What does price stability refer to in economic terms?

Price stability in economic terms primarily refers to maintaining inflation or price level increases at a reasonable, predictable level. This concept is crucial for economic stability as it affects purchasing power, savings, and investment decisions. When inflation is stable and moderate, consumers and businesses can make better financial plans without the fear of rapidly changing prices. A low and stable inflation rate is often targeted by central banks as it allows for sustainable economic growth and helps in avoiding the negative impacts that can arise from both high inflation and deflation.

The focus on keeping inflation at a reasonable level means that while some inflation is natural in a growing economy, excessive or unpredictable inflation can be detrimental. By targeting price stability, policymakers aim to foster an economic environment that encourages growth and investment while protecting the value of money. This choice encapsulates the essence of price stability, which is not about eliminating inflation entirely (as seen in other choices), but rather managing it effectively.