It's fine as long as t-bill rates match or exceed inflation. Then you can avoid losing purchasing power by just putting your money in the world's safest investment. Over the past century, t-bill returns have slightly exceeded inflation on average, though there have been periods when they didn't.

Stash paper cash in your safe and sure, you lose purchasing power. Use fiat money the way it's designed to be used, instead of using it like gold coins, and it works better.

That's by design.

If currency doesn't devalue then stuffing it under a mattress looks like a reasonable alternative to investing. If we hit deflation you can receive gains for "free" and borrowed money becomes more expensive over time. Neither of which our economic system is setup to handle.

We punish people who hoard cash by devaluing it thus encouraging them to put the money to work.

Why is that not good? When inflation is close to 0 real interest rates increase which causes the economy to slow down. It seems clear to me that the optimal rate of inflation is always above 0.

> Why those arbitrary thresholds?

The broad idea is you want a number low enough that people don't price inflation expectations into day-to-day pricing but not so low that a hiccup causes deflation.

The empirical evidence around inflation persistence is a bit all over the place, but broadly suggests people start daily indexing between 2 and 5%. When that starts to happen, restraining inflation without causing a depression becomes incredibly hard, because people will actively countermand policy moves.

The fed has a dual mandate to maintain full employment and keep inflation at 2%. Others have already explained why 2% and not 0%. Up to 3% is expected, 4% means significant price shocks and they should consider acting quickly. 5% means they are at risk of losing control of inflation as it's more than doubled from their mandate and the fed risks losing credibility with markets

In complete seriousness:

An offhand remark made by New Zealand's Finance Minister, Roger Douglas, during a 1988 television interview.

Part of it is just expectations btw. If the value of money is jumping up and down rapidly it is bad for business. Like if I'm going to sell you a 30 year fixed rate mortgage we require an accurate expectation of future inflation for one of us not to effectively lose their shirt on the deal. Imagine shops shuffling their prices up and down constantly, unions renegotiating contracts all the time, you sign up for 12 months of netflix but the price implicitly assumes that money will be worth N% less by month 12, etc. (imo a lot of these things should already be pegged, but people don't like doing that) It's basically just much more annoying to transact using a currency whose future value is unpredictable. So given that 2% is the stated target, which expectations are presumably largely built around, significant deviation is a failure to manage that process.

In general, higher inflation has a negative impact on consumer sentiment even if wage growth matches the inflation, which it rarely does.

But the bigger issue is that inflation is generally distributed much more evenly than wage increases. Very few employers offer a COLA that is automatic, so wages almost always trail inflationary pressure.