Why Does the Fed Care about Inflation?

Some countries have experienced such high inflation rates that their money became worthless. Their citizens had piles, boxes, or wheelbarrows full of money, yet they were not able to buy anything because prices had gotten so high! At such high inflation rates, the economy tends to break down. The Federal Reserve works to control inflation to provide our country with a stable economy.

The Fed cares about inflation because it’s a part of our mission

The US government established the Federal Reserve to foster economic prosperity and social welfare. Part of the mission Congress has given to the Federal Reserve is to keep prices stable. This means not letting prices rise or fall too quickly.

The Federal Open Market Committee (FOMC), which is the part of the Federal Reserve that sets monetary policy, sees 2 percent as the right amount of inflation. The FOMC uses annual changes in the price index for personal consumption expenditures (PCE) as its preferred measure of inflation.

How does the Fed control inflation?

The Federal Reserve seeks to control inflation by influencing interest rates. When inflation is too high, the Federal Reserve typically raises interest rates to slow the economy and bring inflation down. When inflation is too low, the Federal Reserve typically lowers interest rates to stimulate the economy and move inflation higher.

Want to know more?

• Read about the Fed’s “dual mandate” and more about how it measures and influences inflation.
• Watch this video to better understand why a little inflation is a good thing and the importance of managing it:

• Have you been hearing people on social media and in the news talking about different types of ‘flation? Watch these short videos on disinflation, shrinkflation, stagflation, hyperinflation, and deflation. 
• Explore our interactive infographics:
  • Why is what people expect inflation to do so important?
  • How does raising interest rates help to lower inflation?
  • Why do policymakers filter out food and energy prices to get a read on where inflation is headed?