erience with low, stable levels of inflation, in the range of 2 to 3 percent, has spurred policy makers to consider the possibility of achieving zero percent inflation. Reducing inflation however has costs in lost output and unemployment during the adjustment. Thus, an important question is whether zero percent inflation is sufficiently better for the economy than 2 to 3 percent inflation to warrant the effort of getting there. PUBLIC PERCEPTIONS Americans are most concerned that inflation may lower their standard of living -- that their incomes will not keep up with the rise in prices. This anxiety is particularly pronounced for retirees, uneasy about inflation adjustments to their pensions and financial investments. To plan for retirement requires forming expectations of prices in the future. Inflation makes this more difficult because even a series of small, unanticipated increases in the general price level can significantly erode the real (adjusted for inflation) value of savings over time. Shiller finds that worry about inflation's costs increases dramatically as individuals near retirement age. Americans born before or after 1940 differ more in their evaluation of inflation's effects than do the U.S. and German populations as a whole. Social Security payments are now indexed to inflation, a policy change that has reduced somewhat the effects of inflation uncertainty on retirement. Thus, anxiety now focuses more on savings in long- term maturities such as bonds and on employer pensions which typically are not indexed. Concern about living standards also stems from the widespread belief that inf...
