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What is price stability and why does it matter?
What does price stability mean?
The ECB aims to keep prices stable in the euro area.
It is normal for some prices to rise while others fall at any time. What the ECB wants to avoid is for the general price level to have large fluctuations over time. It seeks to avoid prolonged increases in prices (inflation) but also prolonged falls in prices (deflation).
In practice, the ECB wants to make sure that inflation remains low and stable.
Why is price stability important?
Price stability is beneficial to the economy and improves the well-being of citizens:
- If prices are stable, money keeps its value over time. With a certain amount in euro, people can buy more or less the same amount of goods and services today and in the future;
- Everyone can plan better for the future, without fearing that they may lose their purchasing power. Households and firms are able to make better decisions on what they consume and invest;
- There are better conditions in general for the economy to grow and to create jobs.
On the other hand, inflation that is too high or too low is harmful to the economy:
- If inflation is too high and very unstable, money loses value and it is difficult for households and firms to plan their spending. Such instability harms investment and economic growth;
- If deflation occurs, some people may postpone their spending because they expect prices to fall. Lower prices might sound good, but if everyone cuts back on spending, firms could fail and people could lose their jobs.
Price stability is important for all citizens. The ECB has the tools to keep prices stable; therefore, this is its main responsibility.