Price Stability

price stability (uncountable)

1. (economics) A state of economy characterized by low inflation, and thus a stable value of money. Price stability is one of the central goals of most governments and central banks.

A situation in which prices in an economy don't change much over time. Price stability would mean that an economy would not experience inflation or deflation. It is not common for an economy to have price stability.

The situation whereby the prices of goods and services offered in the market place either change very slowly or do not change at all. Factors affecting this include employment and inflation.

Benefits of price stability

The objective of price stability refers to the general level of prices in the economy. It implies avoiding both prolonged inflation and deflation. Price stability contributes to achieving high levels of economic activity and employment by

* Improving the transparency of the price mechanism. Under price stability people can recognize changes in relative prices (i.e. prices between different goods), without being confused by changes in the overall price level. This allows them to make well-informed consumption and investment decisions and to allocate resources more efficiently;

* Reducing inflation risk premia in interest rates (i.e. compensation creditors ask for the risks associated with holding nominal assets). This reduces real interest rates and increases incentives to invest;

* avoiding unproductive activities to hedge against the negative impact of inflation or deflation;

* reducing distortions of inflation or deflation, which can exacerbate the distortionary impact on economic behavior of tax and social security systems;

* preventing an arbitrary redistribution of wealth and income as a result of unexpected inflation or deflation;

* and contributing to financial stability.

While the Treaty clearly establishes the maintenance of price stability as the primary objective of the ECB, it...