Price stability

Short description: Monetary policy

Price stability is a goal of monetary and fiscal policy aiming to support sustainable rates of economic activity. Policy is set to maintain a very low rate of inflation or deflation. For example, the European Central Bank (ECB) describes price stability as a year-on-year increase in the Harmonised Index of Consumer Prices (HICP) for the Euro area of below 2%. However, by referring to "an increase in the HICP of below 2%" the ECB makes clear that not only persistent inflation above 2% but also deflation (i.e. a persistent decrease of the general price level) are inconsistent with the goal of price stability.[1]

In the United States, the Federal Reserve Act (as amended in 1977) directs the Federal Reserve to pursue policies promoting "maximum employment, stable prices, and moderate long-term interest rates".[2] The Fed long ago determined that the best way to meet those mandates is to target a rate of inflation of around 2%; in 2011 it officially adopted a 2% annual increase in the personal consumption expenditures price index (often called PCE inflation) as the target.[3] Since the mid-trend 1990s, the Federal Reserve's measure of the inflation trend averaged 1.7%, a mere 0.3% shy of the Federal Open Market Committee’s 2% target for overall PCE inflation. Trend inflation as measured by the price index of core personal consumption expenditures (PCE) – that is, excluding food and energy – has fluctuated between 1.2% and 2.3% over the past 20 years.[4]

In managing the rate of inflation or deflation, information and expectations play an important role, as explained by Jeffrey Lacker, President of the Federal Reserve Bank of Richmond: "If people expect inflation to erode the future value of money, they will rationally place a lower value on money today. This principle applies equally well to the price-setting behavior of firms. If a firm expects the general level of prices to rise by 3 percent over the coming year, it will take into account the expected increase in the costs of inputs and the prices of substitutes when setting its own prices today."[5]

## See also

* Consumer price index by country
* Inflation targeting
* List of countries by inflation rate

## References

1. ↑ ""The definition of price stability", European Central Bank, on line (April 5 2017).". https://www.ecb.europa.eu/mopo/strategy/pricestab/html/index.en.html.
2. ↑ Public Law 95-188 (Nov. 16 1977).
3. ↑ "The Fed's plan to hike interest rates". The Economist. https://www.economist.com/blogs/economist-explains/2015/08/economist-explains-21.
4. ↑ Cecchetti, Stephen; Schoenholtz, Kim (28 March 2017). "The Fed's price stability achievement: A case for Federal Reserve independence". http://voxeu.org/article/fed-s-price-stability-achievement.
5. ↑ "The Outlook for Inflation and Inflation Expectations - Speech, Jeffrey M. Lacker, March 21, 2016 - Federal Reserve Bank of Richmond". https://www.richmondfed.org/press_room/speeches/president_jeff_lacker/2016/lacker_speech_20160321.

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Central banks

Global|

* Bank for International Settlements
* Basel Committee on Banking Supervision
* Financial Stability Board

Policies|

* Capital requirement
* Contractionary monetary policy
* Expansionary monetary policy
* Basel II
* Basel III
* Basel IV

Implementation|

* Capital control
* Discount rate
* Interest rates
* Money creation
* Open market operation
* Sovereign wealth fund

Bretton Woods system|

* International Monetary Fund
* World Bank Group
* International Bank for Reconstruction and Development
* International Centre for Settlement of Investment Disputes
* International Development Association
* International Finance Corporation
* Multilateral Investment Guarantee Agency

Lists|

* List of central banks
* Central banks and currencies of Africa
* Central banks and currencies of Asia-Pacific
* Central banks and currencies of the Caribbean
* Central banks and currencies of Europe
* Central banks and currencies of Central America and South America

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