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Informing the public about the Federal Reserve
What is an acceptable level of inflation?
The Federal Reserve has not established a formal inflation target, but policymakers generally believe that an acceptable inflation rate is around 2 percent or a bit below.
Four times per year, Federal Open Market Committee (FOMC) participants--that is, the members of the Board of Governors and the presidents of the Federal Reserve Banks--make projections for how they expect the prices of goods and services purchased by individuals (known as personal consumption expenditures, or PCE) to change over the longer run. The longer-run inflation projection is the rate of inflation that the FOMC believes is most consistent with stable prices in the longer term. The FOMC can then implement monetary policy to help maintain an acceptable inflation rate; that is, a rate that is neither too high nor too low. If inflation is too low, the economy might be in danger of falling into deflation, which means prices and perhaps wages, on average, are falling--a phenomenon associated with very weak economic conditions. Having at least a small level of inflation makes it less likely that the economy will experience harmful deflation if the economy weakens.
As of June 22, 2011, FOMC participants' PCE inflation projections for the longer run ranged from 1.5 percent to 2.0 percent.
