Price stability should be understood as a low, stable and predictable inflation rate that provides certain advantages:

• Reduces the uncertainties related to the general economic environment, which accordingly simplifies the economic decisions that firms have to make. Business plans are easier to conceive, even on a longer time horizon, and this has the effect of dampening investments that are predominantly short time oriented. Long term investments have a bigger potential to create new jobs and improve productivity.
• Contributes to lower medium and long term interest rates, which stimulate investments. A central bank can have an immediate influence only on short term interest rates (for further details, see Monetary policy transmission mechanism). However, long and medium term interest rates exert the largest influence on domestic activity. These interest rates depend to a great extent on factors such as price stability and inflation expectations.
• Improves the information contained in the relative prices of goods and services. Thus, the actual differences between economic goods can be more easily contemplated by households and firms; usually, when price increases spread throughout the entire economy, information is overcast and differences are harder to perceive. Improving the transparency of information increases the efficiency of resource allocation and hence the potential for economic growth.
• A sustained low and stable inflation rate is self-reinforcing (for further details, see The importance of inflation expectations).
  

Experience shows that a high, volatile and thus less predictable inflation rate, has some disadvantages:

• Increases the uncertainty associated with the general economic environment, therefore amplifying the volatility of macroeconomic indicators. This prompts investors to perceive domestic assets as being more risky. Interest rates and exchange rate will be the first variables affected, because more risk adverse investors will demand a higher risk premium. Rising or more volatile interest rates and exchange rate make capital costlier and investment projects harder to finance.
• Promotes the unfair wealth transfer between debtors and creditors, particularly in those circumstances where contracts were agreed upon in nominal terms. Because the exchanged cash-flows are fixed, if inflation turns out to be higher than what was expected at the time when the contract was signed, a debtor will have to pay less in real terms, while a creditor will have to accept a smaller payment in real terms.