Monetary policy
Why does the Fed target 2% inflation instead of zero?
Learn why the Federal Reserve aims for 2% PCE inflation, how the target differs from CPI, and what 2% means for long-term prices.
A stable rate is different from an unchanged price level
The target concerns how quickly prices change, not a promise to freeze every price. The Fed explains its 2% objective in terms of its mandate and the advantages of low, predictable inflation. A particular household can experience a different rate.
Why not zero?
When inflation and nominal interest rates are very low, central banks have less room to support the economy by cutting rates. Falling prices can also increase the real burden of fixed nominal debts. A small positive inflation rate creates a buffer, although no chosen target eliminates every economic risk.
What 2% does over decades
In a hypothetical world with exactly 2% inflation each year, a $100 basket costs about $121.90 after 10 years and $181.14 after 30. These are compound-growth calculations, not a forecast that inflation will remain at target. Even low inflation has a meaningful cumulative effect over a long horizon.
The target is PCE, not every monthly CPI release
A single CPI number above or below 2% is not a complete assessment of the goal. Check the measure and the time horizon. The CPI versus PCE guide explains the difference, and the inflation loss calculator can illustrate alternative future-rate assumptions.
Does a 2% target mean prices are supposed to fall after high inflation?
No. A target for the inflation rate does not by itself require reversing earlier price increases. Returning to 2% growth can leave the price level above its earlier path.