The 2% Inflation Target

What Is The 2% Inflation Target?

The 2% inflation target is the Federal Reserve's official goal for annual inflation, measured by the Personal Consumption Expenditures (PCE) price index. The Fed first formally adopted this explicit numerical target in 2012, giving concrete meaning to the "price stability" half of its dual mandate. In AP Macroeconomics terms, pursuing a specific numerical goal like this is an example of an inflation targeting framework. The Fed prefers a 2% target over 0% because a small, steady rate of inflation provides a buffer against deflation and leaves more room to cut interest rates during downturns, when nominal rates cannot fall far below zero.

Why It Matters

A clear numerical target anchors expectations: if households and businesses trust that inflation will average around 2%, they set wages and prices accordingly, which helps keep actual inflation near the goal. The target also gives the public a yardstick to judge Fed performance. Reality rarely sits exactly at 2%: U.S. inflation fell close to 0% in 2015 as oil prices collapsed, then the 2021-2022 surge pushed headline CPI to roughly 9% year-over-year before cooling back near the target by around 2024. The Fed uses PCE rather than CPI because PCE better captures how consumers shift their spending when prices change, giving a broader picture of cost-of-living pressures.

Test Your Knowledge

Questions on this topic from the EconRecall fact bank:

• What is the Federal Reserve's official inflation target?
  2% (annual, based on the PCE price index)
• In what year did the Fed first formally adopt an explicit numerical inflation target?
  2012
• Which price index does the Fed officially prefer for measuring its 2% inflation target?
  The Personal Consumption Expenditures (PCE) price index