Why has the Bank of England got an inflation target of 2.5% and not a 0% target ?
Policymakers attempt to keep an element of inflation in the economy and that is why the Bank of England has a 2.5% inflation target. Whilst there are dangers in running an economy with inherent inflation, the dangers of inflation are a lot less than the economy slipping into a deflationary scenario ! Deflation is not only a serious economic problem, but an even more serious psychological problem because of human nature. This is why it is to be avoided, even at the expense of a mildly inflationary environment.
