Price stability means a “low” inflation, that is to say very small rates of increase in consumer prices. Maintaining price stability is the primary objective of the euro-area central banks and a fundamental goal of the main central banks as well.
In practice, the precise definition of price stability varies with the institutional context. In the Eurosystem, composed of the European Central Bank (ECB) and the national central banks of the European Union countries that have adopted the euro, the Governing Council of the ECB has established that a situation of price stability exists when the twelve-month increase in the harmonized index of consumer prices for the euro area is lower than 2 per cent ( “harmonized” means here that the price index has been calculated using homogeneous criteria for all the countries of the area).
In pursuing price stability, the ECB seeks to hold inflation below but close to 2 per cent over a medium-term horizon. This specification indicates that the intent is to avoid an inflation rate too close to zero, which could usher in deflation, a persistent decrease in the general price level that is also harmful for the economy. At the same time, it signals that monetary policy does not aim to fine-tune the inflation rate over the short term, both because some of monetary policy’s effects appear with a lag and because some fluctuations in inflation may be temporary and not require any response from the central bank.
Maintaining price stability prevents the negative effects that inflation produces on the functioning of an economy. These include loss of value of savings (especially to the detriment of the most vulnerable part of the population), difficulty of accurately evaluating the changes in relative prices on which households and firms base their consumption and investment decisions, automatic increase in taxation, and higher interest rates reflecting the premium for the risk of inflation.
The objective of price stability and that of ensuring high economic growth and employment are complementary. The experience of many countries shows that, over the long run, countries with lower inflation tend to enjoy faster growth in output and employment. By ensuring price stability, therefore, a central bank makes its essential contribution to raising an economy’s capacity to produce and improving the outlook for employment.
Price stability: why is it important for you?
The European Central Bank, in cooperation with the national central banks of the euro area, has produced an information kit entitled "Price stability: why is it important for you?" for young teenagers and teachers.
This tool consists of an eight-minute animated film, leaflets for pupils and a teachers' booklet. The film features two secondary school pupils, Anna and Alex, finding out about price stability. The leaflets provide an easy-to-understand overview of the topic, whereas the booklet covers it in greater detail.