Why People Use ~2–3%
A common long-run planning range — not a promise
Most long-term financial plans assume inflation somewhere between 2% and 3%. That range is not arbitrary, and it is also not a forecast. Understanding where it comes from tells you when to use it and when to use something else.
Where the range comes from
US inflation has averaged roughly 3% over the past century, with long stretches meaningfully above and below that figure.
The Federal Reserve targets 2% as a policy goal, which anchors expectations and is why so many plans use that number specifically.
Splitting the difference between the historical average and the policy target is how most planners land in the 2% to 3% range for long-horizon work.
Why the average hides a lot
The 1970s saw double-digit inflation for several years. The 2010s saw rates below 2% for most of the decade. Recent years included a sharp spike well above target.
An average of 3% describes none of those periods accurately. It describes the long run, which is the only thing it is useful for.
This is why the rate is appropriate for a thirty-year retirement projection and inappropriate for estimating next year's grocery bill.
- US inflation has averaged near 3% over the past century.
- The Federal Reserve targets 2% as a policy goal.
- Individual years vary enormously from any average.
- Your personal rate depends on your spending mix.
- Higher assumptions make plans more conservative, which is usually safe.
When to use a higher number
If your spending is concentrated in categories that have consistently outpaced the average — housing, health care, education — a higher assumption is more honest.
Retirement planning often justifies a higher rate too, since health care becomes a larger share of spending as people age.
Using 3.5% instead of 2.5% makes your plan more conservative. If the plan still works, you have built in a useful margin at no real cost.
When a lower number makes sense
If your largest expense is a fixed-rate mortgage, a meaningful chunk of your budget is not inflating at all, which lowers your effective personal rate.
Retirees often see some spending decline over time as travel and activity reduce, which partly offsets rising health costs.
Even then, planning slightly conservatively costs little. Being pleasantly surprised is a much better outcome than the alternative.
How to apply it consistently
The most common error is not picking the wrong rate but using inflation inconsistently — adjusting the goal but not the income, or the return but not the target.
Choose one approach. Either work entirely in today's dollars using a real return, or work entirely in future dollars and inflate both the goal and the contributions.
Write down which approach you used alongside your plan. A year later, nobody remembers, and mixing methods during a review is how errors creep in.
Recheck every few years rather than reacting to any single year's headline. Inflation runs above and below its average for extended periods, and long plans should ride through that.
Try these inputs
- Policy target: $50,000 of spending at 2% for 30 years
- Historical average: same spending at 3%
- Conservative: same spending at 4%