2%

Our Finance Minister Jim Flaherty said many things yesterday… including cutting tax and reducing national debt — two things that cannot be achieved at the same time. And he talkd about inflation rate here too.

Inflation target to remain at 2% for five years Finance Minister, Bank of Canada agree not to alter what has worked in the past HEATHER SCOFFIELD ECONOMICS REPORTER The central bank and the federal government have agreed to renew their 2-per-cent inflation target for another five years. Finance Minister Jim Flaherty and the Bank of Canada announced yesterday that monetary policy will continue to target an annual inflation rate of between 1 and 3 per cent, with a focus on hitting the centre of that range. "Maintaining low, stable and predictable inflation goes right to the bottom line of every household budget," Mr. Flaherty said yesterday, announcing the renewal as part of his economic and fiscal update. Details behind the central bank’s rationale will be released in documents on Monday. But the decision to stick with a target that has worked well for Canada in the past was not a surprise. Bank of Canada Governor David Dodge had signalled that there was no overwhelming evidence to convince him that the target should be any different. Since the early 1990s, the central bank has aimed to use interest rates to keep inflation anchored between 1 and 3 per cent a year. On a monthly basis, the bank looks at both total inflation and core inflation, which excludes the most volatile items, such as energy, food and taxes. In recent years, the bank has preferred to speak about the inflation target as being 2 per cent, rather than a 1- to 3-per-cent range. Plus, it has focused much of its attention on the core rate, rather than the total number, arguing that total inflation is volatile and over the long run will converge with core inflation. And, in the past decade, the Bank of Canada has been remarkably successful at keeping inflation — both total inflation and the core measure — close to its target. Core inflation has averaged 1.8 per cent a year over the past 10 years, while total inflation has averaged 2 per cent. While there is some merit in arguments that the target band should be a little lower, or that the bank should be aiming at the actual level of the consumer price index, rather than the percentage change, "at the end of the day, I think we’ve been very well served by the target," said Craig Alexander, deputy chief economist of Toronto-Dominion Bank. The 2-per-cent target has become part of Canada’s culture now, and to change it would require a lot of groundwork, said Rick Egelton, chief economist for Bank of Montreal. "It’s been a good anchor for the economy. It’s kept wage settlements pretty much in line. I think most people, when they think about wage contracts, probably think about inflation in or around the 2-per-cent range," he said. "They’ve communicated that number and it’s ingrained in most economic agents’ minds and brains, and I don’t see much point in deviating from it," Mr. Egelton added. "If you deviate from it, you need to tell people why the new number is different than the one you have."

There are two kinds of policies: monytary policy: government can increase or reduce interest rate; fiscal policy: government can increase or reduce tax and spending Not many countries set this kind of goal, and Canada’s target to have a stable inflation rate has been very successful in the global economy. If inflation is too high, the government will hike interest rate.         Here it defines two kinds of inflations.  You can find this identical sentence in almost every article talking about the government policies.   According to my professor — the long run only happens after you die.             Agree… changing it will include changing all economics textbooks!     The bottom line: stable inflation is good.  Think about China having inflation rate as high as 5.3%, people will not save money, and will buy like crazy when receiving their paid checks.