Why do we take for granted an inflation target of two percent? Is it because we buy the argument that it is a small number, and that the Fed needs wiggle room to lower rates in times of recession? Is this target really as innocuous as it sounds?
Part of the rationale for a positive inflation target is that people will stop spending if prices go down a little bit. Some economists believe we will put off purchases for as long as we can to get a better deal in the future. Really? You won't buy something today because it will cost one or two percent less next year? I don't buy it, no pun intended.
If you have worked hard and saved money inflation causes problems. Interest rates reflect a number of forces. First, there is the return needed to compensate for risk and to compete with other investment opportunities. This is called the "real" rate of interest. The interest rate also reflects expectations about future inflation. Add the two together and you get the "nominal" rate of interest - the number quoted in the news and at your bank.
The problem with inflation is that if you choose not to invest - maybe you just didn't see anything you liked - you will lose money as inflation will make your dollars worth less in the future. This forces people to invest money when they wouldn't otherwise. Isn't it possible that savers would get a better deal, a higher real interest rate, if there was no inflation? This could occur because borrowers would have to compete against the saver's option to do nothing. Inflation takes this option away and offers nothing in return.