“2% Inflation Objective”

After every Fed meeting where they decide whether to raise, lower, or leave the federal funds rate unchanged, it is explicitly stated that they are trying to meet a “2% inflation objective.” I don’t know how many people think about that goal but what it essentially means is that the prices of goods and services will double in only 35 years, assuming inflation consistently hits their “2% objective.”

One part of the Federal Reserve’s mandate says that they are supposed to ensure “stable prices,” so it’s surprising how normal that statement of a “2% inflation objective” has become. Most of us know that our US dollar buys a lot less than it did several decades ago, but many seem to be unaware that their purchasing power decreases that quickly over time and especially over one’s lifetime.

Of course, one benefit of inflation is that it tends to inflate away debt. That can help the government, companies, and even individuals. After all, it’s not a bad strategy to pay off a mortgage over 30 years with ever devaluing dollars. But savers or those who are on a fixed income are clearly punished in an inflationary environment.

Most of us do invest and plan for retirement because we know we need our assets to keep up with inflation and to ideally exceed it. A balanced portfolio must include some physical assets, such as real estate. Buying a home should always prove to be a sound investment over time, as you can convert that property back into newly valued dollars at some point in the future. In other words, your home will always be “tradeable” for something else worth a very high value, regardless of what the dollar bill in your pocket is worth a generation from now.