Glossary · Money and central banks
Inflation target
An inflation target is the rate of price rises a central bank promises to aim for, most often 2% a year.
Also called: 2% inflation target, inflation targeting, price stability goal
PCE prices, 12 months to Sep 2026. Target: 2%.
A year, PCE prices, since the Fed named its 2% goal
HICP, average for the year. Target: 2%.
In plain words
Imagine a teacher who says, “There will be a test about every two weeks.” Nobody loves tests, but at least you can plan. An inflation target works the same way: the central bank tells everyone how fast it wants prices to rise, so families, workers and companies can plan around it.
Most central banks of rich countries aim for 2% a year: the US Federal Reserve, the European Central Bank, the Bank of England, the Bank of Japan, the Bank of Canada. When inflation runs above the target they raise interest rates; when it runs below, they cut.
In the US, prices by the Fed’s favorite measure rose 3.6% in the 12 months to September 2026, above the 2% target.
Example
Why 2% and not zero?
- At 2% a year, $100 of shopping costs $121.90 after 10 years and $181.14 after 30: noticeable, but slow enough to plan around.
- Price indexes tend to overstate inflation a little, because they miss some improvements in quality, so a measured 2% is a bit less in reality.
- A target above zero leaves room to cut: with inflation at 2% and a key rate around 4%, a central bank has 4 points to cut in a recession.
- And it keeps a safe distance from deflation, falling prices, which can freeze spending and make debts harder to repay.
2% is a compromise: low enough that people stop worrying about prices, high enough to keep a cushion.
One level deeper
New Zealand was first: its central bank adopted a formal inflation target in 1990. Canada followed in 1991 and the UK in 1992, and today dozens of central banks have one. The Fed named 2% officially only in January 2012, and the Bank of Japan in January 2013.
Targets differ in the details. The Fed aims at 2% for the PCE price index, not the better-known CPI. The ECB aims at 2% for the euro area’s HICP and calls its target symmetric: it worries about undershoots as much as overshoots. Canada aims at 2% within a range of 1% to 3%, Australia at 2% to 3%. Countries with a history of faster inflation often aim higher: India and Russia at 4%, Türkiye at 5% in the medium term.
Since the Fed named its goal, US inflation by its measure has averaged 2.4% a year (to Sep 2026). It ran below 2% in most years of the 2010s and far above it in 2021–2023.
Inflation against the 2% target, year by year
Both the Fed and the ECB aim at 2%. For a decade after 2009 inflation ran mostly below it; the surge after 2020 overshot it by far, and both central banks answered with steep rate rises.
The numbers behind the chart
| Date | United States (PCE prices) | Euro area (HICP) |
|---|---|---|
| 1999 | 1.5% | 1.1% |
| 2000 | 2.5% | 2.1% |
| 2010 | 1.8% | 1.6% |
| 2020 | 1.1% | 0.3% |
| 2021 | 4.0% | 2.6% |
| 2022 | 6.6% | 8.4% |
| 2023 | 3.9% | 5.4% |
| 2024 | 2.6% | 2.4% |
| 2025 | 2.6% | 2.1% |
Why it matters
A known target anchors expectations: if everyone expects about 2%, wages and prices are set around 2%, which makes 2% easier to hit.
It tells you what cash will lose: at a 2% target, money in a drawer loses about a fifth of its value every 10 years.
It explains central bank moves: with inflation well above target, rate rises stay on the table; well below it, cuts.
A common mistake
Myth: A 2% target means prices should stay the same.
In fact: It means prices are supposed to rise about 2% every year, compounding. Central banks treat falling prices (deflation) as a danger too, and most do not try to undo past inflation by pushing prices back down.
Questions people ask
Why is the inflation target 2%?
It is a compromise, not a law of nature: low enough not to distort decisions, high enough to leave room for rate cuts and to stay clear of deflation, and it allows for price indexes that slightly overstate inflation.
What does the Fed use to measure inflation?
The PCE price index from the Bureau of Economic Analysis, not the CPI. It covers more of what is spent on people, including health care paid by employers and the government, and usually runs a little below CPI inflation. PCE prices rose 3.6% in the 12 months to Sep 2026; the CPI rose 3.7% (to Sep 2026).
Has the Fed hit its 2% target?
Since January 2012, when it named the goal, PCE inflation has averaged 2.4% a year (to Sep 2026). It ran below 2% in most years of the 2010s and far above it in 2021–2023.
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About the numbers
- The numbers on this page are recalculated from the data every night; the sources are listed at the end of the page.
- Euro area inflation (HICP), annual average: European Central Bank / Eurostat, ECB Data Portal, series ICP.A.U2.N.000000.4.AVR (HICP overall index, euro area, annual average rate of change).
- Consumer price index, all items (CPI-U): U.S. Bureau of Labor Statistics, Consumer Price Index, series CPIAUCSL; retrieved from FRED, Federal Reserve Bank of St. Louis.
- Personal consumption expenditures: chain-type price index: U.S. Bureau of Economic Analysis, National Income and Product Accounts, Table 2.8.4, series PCEPI; retrieved from FRED, Federal Reserve Bank of St. Louis.
- Targets in the picture and the text are as each central bank states them on its own website (checked November 2026).
- This page explains a term. It is not investment advice.