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. Headline Inflation

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

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

    The types of investments that provide protection against inflation ...
  4. Base Effect

    The consequence of abnormally high or low levels of inflation ...
  5. Core Inflation

    A measure of inflation that excludes certain items that face ...
  6. Inflation Swap

    A derivative used to transfer inflation risk from one party to ...
Related Articles
  1. Insights

    A Primer On Inflation

    Inflation has a negative connotation, but is it all bad or does it offer some tangible benefits?
  2. 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.
  3. Insights

    Inflation's Impact On Stock Returns

    When stocks are divided into growth and value categories, the evidence is clear that value stocks perform better in periods of high inflation, and growth stocks perform better during periods ...
  4. 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.
  5. Investing

    What Causes Inflation in the United States

    Inflation is the main catalyst behind U.S monetary policy. But what causes this phenomenon of sustained rising prices? Read on to find out.
  6. 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.
  7. Insights

    Inflation And Economic Recovery

    Inflation impacts the costs of every facet of the economy. Discover how it can help or hinder the economic recovery.
  8. Insights

    The Importance Of Inflation And GDP

    Learn the underlying theories behind these concepts and what they can mean for your portfolio.
RELATED FAQS
  1. 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 >>
  2. 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 >>
  3. 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 >>
  4. 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 >>
  5. What is the difference between the cost of living and the cost of inflation?

    Increases in the general price level is called inflation, whereas cost of living is an estimate of the cost of an average ... Read Answer >>
Hot Definitions
  1. Trumpcare

    The American Health Care Act, also known as Trumpcare and Ryancare, is the Republican proposal to replace Obamacare.
  2. Free Carrier - FCA

    A trade term requiring the seller to deliver goods to a named airport, terminal, or other place where the carrier operates. ...
  3. Portable Alpha

    A strategy in which portfolio managers separate alpha from beta by investing in securities that differ from the market index ...
  4. Run Rate

    1. How the financial performance of a company would look if you were to extrapolate current results out over a certain period ...
  5. Hard Fork

    A hard fork (or sometimes hardfork) is a radical change to the protocol that makes previously invalid blocks/transactions ...
  6. Interest Rate Risk

    The risk that an investment's value will change due to a change in the absolute level of interest rates, in the spread between ...
Trading Center