Let me pick up and quote from a featured guest, Andrew Harless:
[S]tability is the main advantage cited for a low-inflation regime. We are comfortable with 2% per year inflation, but higher rates could be a slippery slope, as in the 1960s and 1970s. And even if we do not slide down the slope, its potential existence will make people nervous, be a drag on the economy and produce excessive volatility. Yet that does not seem to have been a major problem from 1983 to 1991, when the Fed successfully maintained a stable inflation rate in the 4-5% range. If economic stability is our goal, the real resilience provided by a higher inflation rate should trump the illusory comfort provided by a lower one...
Between the end of the early 1980s recession and the end of the early 1990s recession, inflation in the United States fluctuated between 1.5% and 6.0%--but at no time was there any lack of confidence in the Federal Reserve's long-run commitment to low inflation, at no time did the United States slide down the slippery slope, and if there were any complaints that any average inflation rate of 4% during that decade noticeably degraded the functioning of the price mechanism, I have not heard them.
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