What is the implication of having an inflation target close to two percent?

Having an inflation target close to two percent is commonly associated with promoting long-term price stability. This target acts as a benchmark for central banks, indicating a balance between encouraging economic growth and controlling inflation. By maintaining inflation around this level, central banks aim to foster a predictable economic environment, which can help businesses and consumers make long-term financial decisions without the unpredictability that high inflation or deflation might introduce.

This target aligns with the belief that a moderate level of inflation can stimulate spending and investment, as individuals and businesses are less likely to postpone purchases if they expect prices to rise gradually over time. Furthermore, it encourages borrowing and spending, which drives economic activity. A target inflation rate of around two percent serves as a guide for monetary policy, as central banks will adjust interest rates accordingly to influence inflation and stabilize the economy.

While the other options highlight important economic concepts, they do not capture the primary implication of an inflation target. Economic growth cannot be guaranteed simply by setting an inflation target; price stability is more about managing expectations securely rather than ensuring a specific growth rate. Similarly, while an inflation target contributes to reducing the risks of deflation, it does not outright eliminate it, and treasury yields are influenced by various factors beyond immediate inflation targets.