Loading the player...

What is 'Inflation Targeting'

Inflation targeting is 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.

BREAKING DOWN '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.

RELATED TERMS
  1. Price Level Targeting

    A monetary policy goal of keeping overall price levels stable, ...
  2. Headline Inflation

    The raw inflation figure as reported through the Consumer Price ...
  3. Inflation

    The rate at which the general level of prices for goods and services ...
  4. Inflation Protected

    The types of investments that provide protection against inflation ...
  5. Inflation Swap

    A derivative used to transfer inflation risk from one party to ...
  6. Inflation Accounting

    Special accounting techniques, which can be used during periods ...
Related Articles
  1. Insights

    Should You Worry About the U.S Inflation rate?

    Understand how inflation is measured, how U.S. inflation compares to other countries, and if investors should be concerned with rising inflation.
  2. Trading

    How CPI Affects the Dollar Against Other Currencies

    The Consumer Price Index is a broad measure of inflation, and inflation can have a dramatic impact on a currency's value against rival currencies.
  3. Investing

    How Inflation Affects Your Cash Savings

    Prices tend to rise over time and this inflation can cut into the value of your savings. Here are some ways you can manage the situation.
  4. Trading

    Coping With Inflation Risk

    Inflation is less dramatic than a crash, but it can be more devastating to your portfolio.
  5. Insights

    9 Common Effects of Inflation

    Is inflation ever good? Maybe if you like your job it is.
  6. Insights

    How Inflation Affects Your Net Worth

    When calculating your net worth, don't forget to take inflation into account.
  7. Retirement

    Inflation and Financial Planning: A Primer

    Inflation can erode wealth over time and must be considered carefully in a financial plan.
RELATED FAQS
  1. How can inflation be good for the economy?

    Find out why some economists and public policy makers believe that inflation is a good, or even necessary, phenomenon to ... Read Answer >>
  2. What's the highest year-over-year inflation rate in the history of the U.S.?

    Learn about periods with the highest inflation in U.S. history and the mandated role of the U.S. Federal Reserve in controlling ... Read Answer >>
  3. Why are P/E ratios generally higher during times of low inflation?

    Inflation affects equity prices in several ways. Most importantly, investors are willing to pay less for a certain level ... Read Answer >>
  4. What is inflation and how should it affect my investing?

    Inflation, an economic concept, is an economy-wide sustained trend of increasing prices from one year to the next. The rate ... Read Answer >>
  5. What's the lowest year-over-year inflation rate in the history of the U.S.?

    Learn about years with the lowest year-over-inflation in U.S. history. Read about how inflation is calculated using the consumer ... Read Answer >>
Hot Definitions
  1. Five Cs Of Credit

    A method used by lenders to determine the credit worthiness of potential borrowers. The system weighs five characteristics ...
  2. Straddle

    An options strategy in which the investor holds a position in both a call and put with the same strike price and expiration ...
  3. Trickle-Down Theory

    An economic idea which states that decreasing marginal and capital gains tax rates - especially for corporations, investors ...
  4. North American Free Trade Agreement - NAFTA

    A regulation implemented on Jan. 1, 1994, that eventually eliminated tariffs to encourage economic activity between the United ...
  5. Agency Theory

    A supposition that explains the relationship between principals and agents in business. Agency theory is concerned with resolving ...
  6. Treasury Bill - T-Bill

    A short-term debt obligation backed by the U.S. government with a maturity of less than one year. T-bills are sold in denominations ...
Trading Center