Inflation Targeting

AAA

DEFINITION of 'Inflation Targeting'

A central banking policy that revolves around meeting preset, publicly displayed targets for the annual rate of inflation. The benchmark used for inflation targeting is typically a price index of a basket of consumer goods, such as the Consumer Price Index (CPI) in the United States.

Along with inflation target rates and calendar dates to be used as performance measures, an inflation targeting policy may also have established steps that are to be taken depending on how much the actual inflation rate varies from the targeted level, such as cutting lending rates or adding liquidity to the economy.

INVESTOPEDIA EXPLAINS 'Inflation Targeting'

While the U.S. central bank doesn't typically have an explicit target for inflation (unlike other countries such as Canada, Australia and New Zealand), keeping inflation low is one of the Federal Reserve's primary concerns, along with stable growth in gross domestic product and low unemployment levels.

Inflation levels of 1-2% per year are generally considered acceptable (even desirable in some ways), while inflation rates greater than 3% represent a dangerous zone that could cause the currency to become devalued.

VIDEO

Loading the player...
RELATED TERMS
  1. Central Bank

    The entity responsible for overseeing the monetary system for ...
  2. Speculative Bubble

    A spike in asset values within a particular industry, commodity, ...
  3. Federal Reserve Board - FRB

    The governing body of the Federal Reserve System. The seven members ...
  4. Hyperinflation

    Extremely rapid or out of control inflation. There is no precise ...
  5. Monetary Policy

    The actions of a central bank, currency board or other regulatory ...
  6. Maximum Drawdown (MDD)

    The maximum loss from a peak to a trough of a portfolio, before ...
RELATED FAQS
  1. What are the most effective ways to reduce moral hazard?

    There are a number of ways to reduce moral hazard, including the offering of incentives, policies to prevent immoral behavior ... Read Full Answer >>
  2. What are the primary sources of market risk?

    Market risk is the risk of loss due to the factors that affect an entire market or asset class. Market risk is also known ... Read Full Answer >>
  3. In what types of economies are regressive taxes common?

    Regressive taxation systems are more likely to be found in developing countries or emerging market economies than in the ... Read Full Answer >>
  4. What impact does inflation have on the time value of money?

    The impact that inflation has on the time value of money is that inflation decreases the value of a dollar over time. The ... Read Full Answer >>
  5. What are some of the risks of holding liquid assets?

    Liquid assets, such as cash or highly marketable securities, tend to offer lower returns than illiquid assets. This leaves ... Read Full Answer >>
  6. How does the law of supply and demand affect monetary policy in the United States?

    The law of supply and demand affects monetary policy in the United States through the adjustment of interest rates. Interest ... Read Full Answer >>
Related Articles
  1. Entrepreneurship

    Cost-Push Inflation Versus Demand-Pull Inflation

    Gain a deeper understanding of aggregate supply and demand, forces which raise the price of goods and services.
  2. Economics

    Alan Greenspan: 19 Years In The Federal Reserve

    Follow the economic glories and bumbles in the career of the previous Fed chair.
  3. Economics

    Forces Behind Interest Rates

    Get a deeper understanding of the importance of interest rates and what makes them change.
  4. Economics

    An Introduction To Hyperinflation

    Hyperinflation isn't some historical curiosity. It is a very real risk that countries and governments still struggle with today.
  5. Economics

    The Importance Of Inflation And GDP

    Learn the underlying theories behind these concepts and what they can mean for your portfolio.
  6. Economics

    What Is Supply?

    Supply is the amount of goods a producer is willing to produce at a given price, and is one of the most basic concepts in economics.
  7. Economics

    What Part of the Money Supply is M2?

    M2 is the part of the money supply economists use to analyze and predict inflation.
  8. Economics

    Modified Internal Rate of Return (MIRR)

    Modified internal rate of return (MIRR) is a variant of the more traditional internal rate of return calculation.
  9. Economics

    Understanding Structural Unemployment

    Structural unemployment is an economic miss-match where workers fail to find jobs and employers with available jobs fail to find workers.
  10. Economics

    How The GDP Of The US Is Calculated

    The US GDP may not be a perfect economic measure, but the ability to compare it to prior periods and other countries makes it the most applicable.

You May Also Like

Hot Definitions
  1. Fisher Effect

    An economic theory proposed by economist Irving Fisher that describes the relationship between inflation and both real and ...
  2. Fiduciary

    1. A person legally appointed and authorized to hold assets in trust for another person. The fiduciary manages the assets ...
  3. Expected Return

    The amount one would anticipate receiving on an investment that has various known or expected rates of return. For example, ...
  4. Carrying Value

    An accounting measure of value, where the value of an asset or a company is based on the figures in the company's balance ...
  5. Capital Account

    A national account that shows the net change in asset ownership for a nation. The capital account is the net result of public ...
  6. Brand Equity

    The value premium that a company realizes from a product with a recognizable name as compared to its generic equivalent. ...
Trading Center