An increase in economic activity over period of time Goal is to have 2% growth. Which means that wages should rise 2% a year. (Why 2%)? Economic growth does not mean increase in income for all citizens
Why inflation must be equal to economic growth
If growth is happening then wages are rising → If wages are rising buying power is rising too and people start consuming more → More consumption leads to higher prices (producers try to balance demand by increasing prices) → if nothing changes prices keep going up → At some point buying power is starting to erode quickly → People suddenly stop buying as much because prices are too high → Market crash
To avoid this scenario government must ensure that inflation grows along with wages, so that consumption does not go out of control. If inflation is higher than economic growth then people are loosing buying power (they become poorer). If inflation is lower than economic growth then buying power is rising which may lead to a crash. So the inflation rate must be equal to economic growth rate, which is 2%