This increase in the real value of debts due to very low inflation or, worse, outright deflation would also be a burden on all households that have outstanding fixed nominal student loans, auto loans, or credit card debt, as well as businesses that had taken out bank loans or issued bonds.
In 2012, the FOMC set a formal inflation target to help households and businesses understand our goal and help keep inflation expectations anchored over time. The FOMC’s choice of a 2 percent inflation rate, instead of zero, reflected the judgment that reasonable price stability was desirable while also recognizing the reality that very low inflation can also be economically costly.