CPI Returns to 2% Target
Inflation normalized — what changes
CPI returning to 2% represents normalization. This is the regime that prevailed from 2012-2020. At this level, the Fed has flexibility to cut rates if growth slows, removing a major equity headwind.
What history says
Editorial commentary written by ALAN analysts. Figures cited below are analyst-authored context — they are not derived from the chart above and may reflect different windows or sources.
When inflation is at target, the Fed can respond to growth weakness with rate cuts and QE. This asymmetric policy response ('the Fed put') is historically positive for equity valuations.
The 2012-2020 low-inflation regime produced extraordinary growth stock returns. A return to 2% inflation could reignite this dynamic if paired with rate cuts.
At exactly 2%, there is little buffer against deflationary shocks. This is why the Fed adopted 'average inflation targeting' in 2020 — to avoid getting stuck at zero rates again.
Normalization is the moment to unwind the emergency posture: review whether defensive tilts, heavy cash, or inflation hedges added during the high-inflation stretch still earn their place now that the Fed has room to cut again. Rebalance back toward long-term targets deliberately — restored policy flexibility supports valuations, but it is not a reason to chase whatever the last low-rate era favored.