It is true that 3 percent is low relative to the double-digit rates of the late 1970s. With an inflation rate of 3 percent, the value of the dollar is cut in half every 25 years. Investors of all kinds also are concerned that inflation might pick up in the future. The real value of that retirement fund falls about 4 percent, just because inflation was slightly higher. Thus, I believe if we are to meet our obligation of preserving the internal and external value of our currency, it is essential that we have an environment of price stability.
Inflation also interferes with the efficient allocation of resources by confusing price signals.
There is a whole world of difference between living with low inflation and living with moderate or high inflation. As a business person in an inflationary world, one can pass mistakes on and raise prices because everyone else is raising their prices and we consumers tend to accept the increase. Such is less the case in a low-inflation world. Competitors will not let prices increase so easily. Businesses have to minimize mistakes, be more productive, create real wealth, and ensure that nominal increases in wages reflect increases in productivity.