Goal of Low Inflation

The goal of low inflation

One of the government’s primary economic goals is that of low inflation, where inflation represents a sustained increase in the general or average price level over time.  The government (via the Reserve Bank of Australia) seeks to keep the inflation rate between 2-3 per cent on average over the course of an economic cycle.

Points to note about the definition:

  • inflation rates outside this range do not always mean that government has not achieved its goal. Indeed, it may have allowed inflation to creep beyond 3% for a short time in order focus temporarily on economic and employment growth;
  • the definition refers to the general level of prices and therefore means that not all prices are increasing, so some prices may actually decrease;
  • the definition does not use zero inflation as the target as this may not be feasible; and
  • inflation of greater than 2 to 3 percent, whilst it is generally unacceptable, is less problematic when our trading partners are experiencing higher rates of inflation.

Over the 17 years since we first articulated the target, the average CPI inflation rate in that period is pretty much exactly 2.5 per cent. So we have been as low as one per cent and as high as five per cent. We have been outside the two to three per cent probably almost half the time, but the average-which is what matters most-is bang on 2½. That is what we are seeking to deliver.    

Glenn Stevens (RBA Governor) to the House of Representatives Standing Committee on Economics (November 2010)