It is particularly appropriate to overshoot the target when unemployment is higher than its long-run sustainable rate, as it can then reach its long-run sustainable rate sooner. The usual way of applying the current inflation target entails that even if the target is undershot over a period of time the central bank still endeavours to maintain inflation in line with the target. Thus the central bank does not attempt to compensate for the previously low inflation with a period when inflation is above the target. To ensure that average inflation is on target over a longer period of time, the central bank could instead have a so-called price level target that means the price level should be stabilised around a price level path that rises by 2 per cent a year. Such a price level target would mean that average inflation is at 2 per cent over a longer period of time. The advantages and disadvantages of a price level target have been discussed at length in academic literature (see for instance Bank of Canada 2011). Since a downward-sloping long-run Phillips curve makes it important to keep average inflation over a longer period of time on target, this strengthens the arguments in favour of a price level target. A less dramatic change would be a target in the form of a moving average of inflation over a longer period of time, for instance five or ten years (Nessén and Vestin 2005).
Australia has had an inflation target of between 2 and 3 per cent for CPI inflation over the cycle since 1993, and its average inflation rate in the period 1996–2011 was 2.7 per cent. 13  11  An older method of calculating the rate of inflation with an unchanged consumer basket was used in real-time data prior to 2005. Using the current method of calculating the inflation rate as the percentage change in the CPI, average inflation was 1.3 per cent during the period 1997–2011, but real-time data are more relevant when evaluating monetary policy. See Sveriges Riksbank (2004). 12  In the period 1992-1996 the target was expressed as 2.5 per cent or lower in terms of the RPIX. RPIX = Retail Price Index. In the United Kingdom the CPI corresponds to the HICP price index. Since 1993 the average HICP inflation rate has been 0.75 percentage points lower than average RPIX inflation. 13  New Zealand has had an inflation target since 1990, but its target has been adjusted upwards twice and thus one cannot say that it has had a fixed inflation target. 10  BIS central bankers’ speeches  How have things turned out for the large economies, the euro area and the United States? The euro area has had a target for inflation, although during a shorter period than the countries mentioned earlier. The target is that inflation should be below but close to 2 per cent.