Average Inflation Targeting and Framework Reviews

A traditional inflation target treats every period the same: hit roughly 2% now, and don't worry much about what happened before. Average inflation targeting (AIT) changes the arithmetic — if inflation has run below target for a stretch, the central bank aims to let it run above target for a while afterward, so the average over some window still lands near the goal, rather than treating the shortfall as bygones.

The logic is about expectations: if a central bank always undershoots without compensating, households and firms may start expecting persistently low inflation, which itself becomes self-fulfilling and harder to escape. By explicitly promising to make up for undershoots, the bank tries to keep long-run inflation expectations anchored at the target rather than drifting below it.

Worked example. If inflation averages just 1.2% over several years against a 2% target, an AIT framework implies the central bank would tolerate inflation running near 2.5–3% for a period afterward, rather than tightening policy the moment inflation merely touches 2% again.

The Federal Reserve adopted a version of this approach in 2020, alongside a broader framework review that also softened how it interprets full employment, focusing more on shortfalls from maximum employment rather than symmetric deviations in either direction. Critics argue that AIT is vague about exactly how long the averaging window is or how much overshoot is tolerable, which can make the framework harder for markets to price precisely compared with a strict point target, even if it's clearer in principle about the bank's intentions.