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The 2% inflation target
Formal since Jan 2012· Law or rule
Fact, law or dataA rule, statute, definition or measured number.
The Fed's formal goal, set in 2012, of 2% annual inflation as measured by the PCE price index.
See it on the Money & Finance map →How it works
On January 25, 2012, the FOMC declared that 2% inflation on the PCE index best fits its 'stable prices' mandate. New Zealand pioneered numeric targets in 1990, and most rich-country central banks now use 2%. Why not zero? Price indexes slightly overstate inflation, a little inflation is a buffer against deflation, and it leaves room to cut rates in a downturn. At 2% a year, prices double in about 35 years.
Why it matters
It anchors expectations for wages, lease escalators and bond yields. US inflation has mostly run above 2% since 2021, so the path back to it drives rate decisions.
Think of it like
Like a 2% annual rent bump written into a lease: small, predictable increases everyone can plan around.
Facts, rules and data
The FOMC's Statement on Longer-Run Goals, reaffirmed each January and revised in 2020 and 2025; market inflation expectations implied by TIPS yields.
Debates and risks
The choice of exactly 2% is partly historical accident; some economists favor 3% for more room to cut rates, others want zero or a price-level target.
Connections (2)
▸The 2% inflation target defines 'stable prices' in The dual mandate: maximum employment and stable pricesFact, law or data
The connection
The 1977 law says 'stable prices' but gives no number. In 2012 the FOMC interpreted it as 2% annual inflation, judging that zero would risk deflation and that price indexes slightly overstate inflation. Maximum employment, the other half, was left without a fixed number.
When and why
FOMC statement of January 25, 2012, under Chair Ben Bernanke; reaffirmed every January since.
How we know
The Statement on Longer-Run Goals and Monetary Policy Strategy states the 2% figure explicitly.
Debates and risks
Critics ask whether a self-chosen 2% honors a law that says 'stable'; FOMC transcripts show members privately discussed a 2% goal as early as 1996.
▸The 2% inflation target is defined using PCE, one of CPI, PCE and core inflationFact, law or data
The connection
The target is 2% annual change in the PCE price index, not the better-known CPI. The Fed prefers PCE because it covers more spending and adjusts as people switch products. CPI usually runs a few tenths higher, so 2% on PCE means somewhat more than 2% on CPI.
When and why
The Fed switched its main gauge from CPI to PCE in 2000 and wrote PCE into the 2012 target.
How we know
The FOMC's longer-run goals statement names PCE; the Commerce Department publishes it monthly, about two weeks after the CPI.
Debates and risks
The Fed watches core PCE for the trend but targets the headline figure; how much to look through food and energy spikes, as in 2022, is debated.