Price stability is a goal of

monetary Money is any item or verifiable record that is generally accepted as payment for goods and services and repayment of debts, such as taxes, in a particular country or socio-economic context. The primary functions which distinguish money are ...

and

fiscal policy In economics and political science, fiscal policy is the use of government revenue collection ( taxes or tax cuts) and expenditure to influence a country's economy. The use of government revenue expenditures to influence macroeconomic variabl ...

aiming to support sustainable rates of economic activity. Policy is set to maintain a very low rate of

inflation In economics, inflation is an increase in the general price level of goods and services in an economy. When the general price level rises, each unit of currency buys fewer goods and services; consequently, inflation corresponds to a reduct ...

deflation In economics, deflation is a decrease in the general price level of goods and services. Deflation occurs when the inflation rate falls below 0% (a negative inflation rate). Inflation reduces the value of currency over time, but sudden deflatio ...

. For example, the

European Central Bank The European Central Bank (ECB) is the prime component of the monetary Eurosystem and the European System of Central Banks (ESCB) as well as one of seven institutions of the European Union. It is one of the world's most important centra ...

(ECB) describes price stability as a year-on-year increase in the Harmonised Index of Consumer Prices (HICP) for the

Euro area The euro area, commonly called eurozone (EZ), is a currency union of 19 member states of the European Union (EU) that have adopted the euro (€) as their primary currency and sole legal tender, and have thus fully implemented EMU polic ...

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. In the United States, the

Federal Reserve Act The Federal Reserve Act was passed by the 63rd United States Congress and signed into law by President Woodrow Wilson on December 23, 1913. The law created the Federal Reserve System, the central banking system of the United States. The Pani ...

(as amended in 1977) directs the

Federal Reserve The Federal Reserve System (often shortened to the Federal Reserve, or simply the Fed) is the central banking system of the United States of America. It was created on December 23, 1913, with the enactment of the Federal Reserve Act, after a ...

to pursue policies promoting "maximum employment, stable prices, and moderate long-term interest rates". 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. 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. In managing the rate of inflation or deflation, information and expectations play an important role, as explained by

Jeffrey Lacker Jeffrey M. Lacker (born September 27, 1955) is an American economist and was president of the Federal Reserve Bank of Richmond until April 4, 2017. He is now a Distinguished Professor in thDepartment of Economicsat the Virginia Commonwealth Unive ...

, President of the

Federal Reserve Bank of Richmond The Federal Reserve Bank of Richmond is the headquarters of the Fifth District of the Federal Reserve located in Richmond, Virginia. It covers the District of Columbia, Maryland, North Carolina, South Carolina, Virginia, and most of West Virginia ...

: "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."

References

{{DEFAULTSORT:Price stability Public finance Monetary policy