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Across the world, central banks have been vowing for almost two years to return inflation to the target rate of 2%. In practice, this has meant increasing interest rates – the cost of borrowing – in order to slow down economic activity. Today, the Bank of England decided to leave interest rates in the UK at 5.25%, their highest level since 2008.There are almost 60 countries that officially have a 2% inflation target, including the US, UK, Japan and the eurozone, but where does this actually come from? It is perhaps the most important policy objective being pursued today; you would think there must be a slew of empirical support that justifies this chosen target. After all, the target matters a great deal. If it were, say 3% or 4%, we would probably no longer be so concerned with rising prices, as many countries’ inflation has fallen to those levels.I have spent hundreds of hours over the last few years poring over papers and documents at various central banks, going back decades, looking for some sort of document that would justify, or at least explain, the choice of a 2% target. I have not been able to find anything.Now, I am not a fan of the 2% inflation target to begin with, as I am not …
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