It has also to do with CPI being affected by price changes in components that cannot be related to the state of demand. This has been taken into consideration in the design of the main rule and in clarifications and expansions. There has been an endeavour to design the rules in such a way as to avoid unnecessarily large fluctuations in employment and output. However, there must never be any doubt that monetary policy is always governed by the inflation target, although different strategies to achieve this objective in practice can produce different economic costs in the form of fluctuations in output and employment. The fact that the target horizon is normally stated as 1-2 years is justified by the major fluctuations in output that can result from attempts to influence inflation in a shorter time perspective. Interest rates affect inflation with a time lag through effects on demand or the output gap and attain their greatest effect after 1-2 years. In order to reduce inflation in the short term, the interest rate would therefore have to be greatly increased with major negative effects on growth. If CPI is affected by factors that are unrelated to the demand situation, a monetary policy that strictly complies with the main rule can also lead to unnecessary variations in output and employment.
Since inflation is at the same time lower, the differences in the real interest rate are less, however. An important reason for inflation being so low is the broad agreement on the price stability target that now seems to exist. An expression of this is that inflationary expectations remain at a stable level despite expectations on a continued very strong upswing. The Riksbank’s most important duty in future is to ensure that expectations remain at around 2% inflation. The very low inflation which is now registered has, however, surprised many people, including us at the Riksbank. An important explanation as to why GDP growth has now been able to exceed the growth in output that is possible in the long term for many years without threatening the inflation target is, of course, that the upswing started from a level of output that was greatly depressed after the years of crisis, where a lot of resources had been made redundant. When unemployment was at its peak, there were many who feared that it would persist permanently at a considerably higher level than we were previously used to. There was also opposition to the inflation target policy just for that reason. Examples were pointed to in Europe where unemployment had been over the Swedish for a long time, but where there had been greater success in combating inflation. The labour market is performing better than expected It is difficult to determine the rate at which GDP can increase in the long term.