What is Price Stability?
Price stability is a measure of economical stability. In an economy where prices are considered stable, factors such as inflation and deflation have a minimal effect, and prices on goods and services change little from year to year. Generally, price stability is considered to be a good, though not necessarily totally achievable goal for an economy. Some critics suggest that the importance of this measurement may be overstated, and that considering the health of a financial system based on this criteria can result in dangerous oversimplification.
There are several reasons that stability is a goal for economic systems. When prices are stable, it is easier for consumers to understand relative values of products. If a loaf of bread generally costs $2 US dollars (USD), that is what customers will assume is a fair price. In a stable price system, if a supermarket decides to start selling the same loaf of bread for $5 USD, customers will likely notice the change and stop buying that bread because it is being sold far above the regular value. In situations where there is a low level of stability, people may have no clear idea about what a loaf of bread should cost, and thus may be unable to make informed financial decisions.
According to proponents of stability policies, high levels of inflation or deflation lead to a highly unpredictable economy. Corporations may not know whether to lay off workers and decrease production, or hire more workers and increase capacity, since the current economic situation may be a very poor indicator of the future. Long term investing and business planning may become an advanced guessing game, because of the lack of relativity in product values and the potentially massive fluctuations in the market. Creditors may also be unwilling to risk lending money without high premiums against the chance of inflation, causing stagnation in the investment market.
Critics of stability-based fiscal policy tend to cite the high costs of keeping inflation to minimum. By setting a price stability goal to be maintained regardless of outside circumstances, governments may increase taxes and tariffs on citizens to artificially reduce inflation in the name of price stability. Critics also suggest that price stability measures limit flexibility and ingenuity by artificially maintaining price levels. For instance, if oil values shoot through the roof, but artificially imposed standards keeps the purchase price lower than its market value, businesses may have less financial incentive to develop low cost alternative fuels that could reduce the premiums paid on the far more expensive oil.
It is important to note that most economic systems geared toward price stability do not require a total void of inflation or deflation. The goal tends to be to reduce shifts in either direction to an annual minimum, such as under 2%. Few economies experience long-term stability overall, though the price of some goods and services may not alter enormously over time. Developments in technology and transportation, shifts in global financial markets, and even conflicts like war or widespread pestilence can cause frequent havoc in the pursuit of price stability.
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