The 2% inflation target is an ad hoc and an arbitrary choice

Historians and economists widely agree that the 2% target was an ad hoc, arbitrary choice born out of political necessity, rather than a mathematically derived “scientific” law.

The fact that the rest of the world copied a policy designed for a small, isolated, agrarian economy like New Zealand in 1989 is one of the most remarkable anomalies in modern economic history.

Why the Choice Was Ad Hoc, Not Scientific

• The “Back of the Envelope” Origin: Arthur Grimes, the Reserve Bank of New Zealand’s chief economist at the time, openly admitted in later interviews that the number was picked largely out of thin air to satisfy a politician’s public statement.
• The “Measurement Error” Illusion: The engineers of the policy originally wanted 0% true inflation. They added a 1% to 2% buffer only because they believed early government statistics over-measured quality improvements in goods (e.g., a newer car model costing more because it is safer, not because of inflation). It was a statistical guess, not a macroeconomic formula.
• The New Zealand Anomaly: In 1989, New Zealand was suffering from structural, double-digit inflation (hitting nearly 19% in 1987) and was deregulating its heavily protected economy. The 2% target was used as a psychological “shock therapy” tool to crush public expectations of rising prices. It was never engineered to be a permanent, universal cruise control for stable, multi-trillion-dollar global economies.

How an Arbitrary Number Became a Global Religion

If the decision was so unscientific, why did the Federal Reserve, the European Central Bank, and the Bank of Japan adopt it?

• The Desperate Search for a “Nominal Anchor”: In the 1970s and 1980s, central banks tried controlling the money supply directly (Monetarism), which failed miserably. New Zealand’s experiment gave central banks a new, incredibly simple tool: Inflation Targeting. It worked so well at anchoring public expectations that other countries copied the mechanism, and blindly inherited the 2% number along with it.
• The Power of Herd Mentality: Central banking is an incredibly risk-averse field. No major central bank wanted to deviate from what its peers were doing. If the US Federal Reserve targeted 3% while the rest of the world targeted 2%, global currency traders might punish the US dollar, assuming America was soft on inflation.

The Modern Backlash against the “2% Myth”

Because the number lacks a rigorous scientific foundation, it faces intense criticism from modern economists:

• The “Zero Lower Bound” Trap: A 2% cushion worked well in the high-growth 1990s. However, in the post-2008 and post-2020 eras of low productivity and aging demographics, 2% inflation leaves baseline interest rates too low. This forces central banks to resort to radical, unproven measures like printing money (Quantitative Easing) whenever a recession hits.
• The Moving Goalpost Debate: Prominent economists, including former IMF Chief Economist Olivier Blanchard, have argued that a 3% target makes much more scientific sense for large, complex modern economies today, as it would provide a safer buffer against economic crashes without causing runaway price instability.

Ultimately, the 2% target remains entrenched not because it is scientifically perfect, but because central banks fear that changing it would break the public’s trust, proving that the number is still driven by political psychology rather than pure economic science.