The 2% Target Is Dead: Why Central Banks Cling to the Corpse of Economic Dogma

Every morning, central bank chairmen wake up in cold sweat, recounting inflation percentages like monks counting rosary beads, hoping for a miracle that will never come. The 2% target — this Holy Grail of modern monetary policy — has long since become an economic mirage, yet they continue chasing it through the desert of a deglobalizing world, losing the real economy, jobs, and common sense along the way.

But let's face the truth: the world has changed. Deglobalization is tearing apart supply chains, population aging creates labor shortages, climate adaptation demands trillions, reshoring makes production more expensive, and defense spending is skyrocketing. All of this is not temporary shocks but a new structural reality. And the stubborn clinging to the outdated 2% target is beginning to resemble an attempt to stuff the genie back into the bottle using prayers and interest rates.

The Central Banks' Sacred Cow

Where did this magical number even come from? The history of its origin is so absurd you want to laugh through tears. In 1989, the Reserve Bank of New Zealand — not exactly the world's largest economy, you'll agree — simply named a round number that seemed to politicians "low enough not to worry about, and high enough not to fall into deflation." No deep research, no Nobel-worthy science — just a nice number for a press release.

Since then, this number has spread across the world like a virus, infecting the Fed, ECB, Bank of England, and dozens of other regulators. All of them, as if participants in collective hypnosis, accepted 2% as a given, as the economic equivalent of the speed of light — a constant not subject to revision. But physical constants don't change because they reflect fundamental laws of the Universe. An inflation target is merely a political compromise disguised as scientific truth.

You know what's particularly ironic? The very same central banks that for decades couldn't even reach these measly 2% (remember the "too low inflation" era?) are now trying to return to them with the same stubbornness. Maybe the problem isn't inflation, but the target itself?

The Five Horsemen of Structural Inflation

The first horseman is deglobalization. For forty years, the world enjoyed cheap goods from China and Vietnam, until politicians discovered that dependence on a potential adversary isn't the best national security strategy. Now every country wants its own chip, pharmaceutical, and battery production. Wonderful! Except producing them at home costs many times more. Global supply chains are breaking, and with them breaks the hope for cheap goods.

The second horseman is demographic aging. Baby boomers are retiring en masse, and there's no one to replace them. The workforce is shrinking, wages are rising, and so are prices. In Japan, this has been happening for thirty years; now it's Europe's and America's turn. Every second, 4,755 banknotes are printed worldwide, but producing new workers at the same speed is impossible.

The third is climate adaptation. The green transition requires trillions of dollars in investment. New power plants, grids, battery factories — none of this is free. Carbon taxes make dirty production more expensive, while clean production hasn't become cheaper yet. The result? Rising energy prices and everything that depends on it. That is, everything.

The fourth is reshoring and friend-shoring. When Apple moves production from China to India or the US, it doesn't make iPhones cheaper. When Intel builds a fab in Ohio instead of Taiwan, chips don't become more affordable. National security costs money, and the consumer will pay that money.

The fifth horseman is defense spending. Europe suddenly realized that an army isn't just for parades. NATO demands 2% of GDP for defense, and some want a full 3%. Trillions of dollars removed from the productive economy for making tanks and missiles that — hopefully — will never be used. Pure expenditure inflation.

The Price of Stubbornness: Economy on the Altar of Dogma

What happens when central banks try to forcefully squeeze inflation into the Procrustean bed of 2%? They raise rates. And raise. And raise again. Until the economy starts gasping like a marathoner running in a gas mask.

Recession — that's the price of stubbornness. Millions of lost jobs, ruined businesses, deferred dreams. Young people can't buy homes because mortgages have become unaffordable. Companies can't invest because loans are too expensive. All this — to bring inflation down from 3.5% to the magical 2%? Seriously?

Now imagine the alternative. What if — just allow this heretical thought — inflation of 3-4% isn't a catastrophe? What if it's the new normal that the economy is perfectly capable of living and thriving with? History knows periods when moderate inflation accompanied rapid economic growth. The 1950s-60s in the US, post-war Europe — economies grew with inflation above 2%, and nobody was screaming about the end of the world.

Stubborn adherence to an outdated target becomes a ritual sacrifice: we're burning the real economy on the altar of an abstract number invented by bureaucrats of a small island nation thirty-five years ago.

Admit Defeat or Rewrite the Rules?

Some economists — and their numbers are growing — are beginning to speak the unspeakable: it's time to revise the target. Olivier Blanchard, former chief economist of the IMF, proposed raising the bar to 4% ten years ago. Larry Summers acknowledges that structural factors have changed the game. Even within the Fed, voices are heard suggesting that perhaps 2% is a fetish, not science.

The arguments for raising the target are ironclad. First, a higher "normal" inflation level gives central banks more room to maneuver in a crisis. When rates are already at zero and inflation is negative — there's nothing to do. With a 4% target and corresponding rates, there's room to cut.

Second, moderate inflation is lubricant for economic mechanisms. It facilitates adjustment of relative prices and wages, helps debtors pay off loans, stimulates consumption today rather than deferring until tomorrow.

Third — and this is key — fighting for an unattainable goal is destructive. When a general orders an army to take an impregnable fortress at any cost, the result is piles of corpses, not victory. Economic policy should be pragmatic, not dogmatic.

When Fiat Turns to Confetti

But there's another side to the coin. Even if central banks acknowledge the new norm of 3-4%, what does it change for the average person? Their savings will still depreciate — just now officially and with the regulators' blessing. At 4% inflation, your money loses half its purchasing power in 18 years. This isn't protection; it's legalized robbery with economic justification.

Fiat currencies by their nature are doomed to depreciation. Inflation benefits governments: it erodes debts, fills budgets with nominal taxes, allows printing money "out of thin air." Currently, total global government debt exceeds $100 trillion — and the only way to pay it off without default is inflation. The higher, the better for debtors. And the biggest debtor is the government.

In this reality, a sensible investor asks themselves: how to protect savings? Gold — a classic, but inconvenient and inflexible. Real estate — requires millions to enter. Stocks — fall along with the economy in a crisis. Traditional cryptocurrencies — correlate with risk assets. All assets fall together when the storm comes.