DEFINITION of 'Price Level Targeting'

A monetary policy goal of keeping overall price levels stable, or meeting a pre-determined price level target. The price level used as a barometer is the Consumer Price Index (CPI), or some similarly broad measure of cost inputs. A central bank or monetary authority operating under a price level targeting system raises or lowers interest rates in order to keep the index level consistent from year to year.

BREAKING DOWN 'Price Level Targeting'

Price level targeting is similar to inflation targeting in that both establish targets for a price index like the CPI. However, where inflation targeting only looks forward (i.e., a 2% inflation target per year), price level targeting actually takes past years into account when conducting open market operations. So, if the price level rose by 2% in the previous year (from a theoretical base of 100 to 102), the price level would have to drop the next year in order to bring the price level back down to the 100 target level. This could mean more forceful action needs to be taken than would be required if inflation targeting were used.

Price level targeting is generally considered a risky policy stance, and one not used by any of the world's advanced economies. It is believed to bring more variability in inflation and employment in the short run compared to inflation targeting Most economies feel that a small amount of annual inflation is actually a good thing, up to about 2% per year.

  1. Inflation Targeting

    Inflation targeting is a central banking policy that revolves ...
  2. Price Inflation

    Price inflation is the increase in a collection of goods and ...
  3. Target Market

    The consumers a company wants to sell its products and services ...
  4. Price Level

    The average of current prices across the entire spectrum of goods ...
  5. Target Rate

    Target rate is the interest rate charged by one depository institution ...
  6. Headline Inflation

    The raw inflation figure as reported through the Consumer Price ...
Related Articles
  1. Personal Finance

    How Target Can Expand Internationally

    Target needs to get back onto the international scene in order to take on its largest competitors. There's only one way to do it, and it involves the Internet.
  2. Investing

    Target Embraces Being A Dividend Stock (TGT)

    Target has ended its growth stage. Despite plenty of areas in which the company can expand, Target has instead decided to focus on paying dividends.
  3. Insights

    A Primer On Inflation

    Inflation has a negative connotation, but is it all bad or does it offer some tangible benefits?
  4. Investing

    Target Should Focus on Growth, Not Share Buybacks

    Target has an ambitious plan to return money to shareholders. It ought to focus on growth, rather than decrease its cash reserves.
  5. Trading

    Target Takes Aim at Earnings Bullseye

    Target reports earnings with a favorable P/E ratio of 15.72 and a positive dividend yield of 3.30%.
  6. Insights

    Inflation And Economic Recovery

    Inflation impacts the costs of every facet of the economy. Discover how it can help or hinder the economic recovery.
  7. Insights

    The Importance Of Inflation And GDP

    Learn the underlying theories behind these concepts and what they can mean for your portfolio.
  8. Personal Finance

    Short-Sighted Retailers: Why Target is Losing the Retail Wars (TGT)

    Target has not invested enough in its long-term future, preferring instead to borrow ideas from other retailers.
  1. Why Are P/E Ratios Higher When Inflation Is Low?

    P/E ratios are generally higher during times of low inflation, but why is this the case? Read Answer >>
  2. What's the highest year-over-year inflation rate in the history of the U.S.?

    Learn about periods with the highest inflation in U.S. history and the mandated role of the U.S. Federal Reserve in controlling ... Read Answer >>
  3. Under what circumstances will a government change its monetary policy?

    Learn about the kind of variables, including political and theoretical factors, that can bring about change in a government's ... Read Answer >>
Hot Definitions
  1. Standard Deviation

    A measure of the dispersion of a set of data from its mean, calculated as the square root of the variance. The more spread ...
  2. Entrepreneur

    An Entrepreneur is an individual who founds and runs a small business and assumes all the risk and reward of the venture. ...
  3. Money Market

    The money market is a segment of the financial market in which financial instruments with high liquidity and very short maturities ...
  4. Perfect Competition

    Pure or perfect competition is a theoretical market structure in which a number of criteria such as perfect information and ...
  5. Compound Interest

    Compound Interest is interest calculated on the initial principal and also on the accumulated interest of previous periods ...
  6. Income Statement

    A financial statement that measures a company's financial performance over a specific accounting period. Financial performance ...
Trading Center