The level of the inflation target – a review of the issues

Most developed countries that conduct inflation targeting have chosen a target level at or close to 2 per cent. Recently, an international debate has arisen on whether this level should be increased. In this article, we review both the arguments in the more policy-oriented debate on the level of the inflation target and what academic research says about the optimal rate of inflation. One conclusion is that the threshold for increasing the target is high, primarily because there are significant practical problems linked to abandoning a target that is already established and changing to another one. The article also discusses the challenges that central banks can face in the near term as regards achieving their current targets.