However, in some situations it may be necessary to allow a little longer time than two years for inflation to return to target, in order to avoid causing unnecessary fluctuations in the real economy,” continued Mr Öberg. “My experiences of forecasting work are that there is considerable uncertainty linked to longer-term forecasts. This makes it important to take into account different types of risk when making monetary policy decisions. One risk that I envisage is connected with the strong developments in the real economy – the strong growth and rapid increase in employment. We will probably attain a fairly normal capacity utilisation level in the labour market in the not too distant future, while the central wage agreements for the greater part of the labour market will be renegotiated next year. In the February Inflation Report, underlying domestic inflation was calculated at up to 3 per cent at the end of the forecast period, which reflects an expectation of relatively high domestic cost pressures,” said Mr Öberg. “In my opinion, there can be some risk that the expansionary monetary policy will overly reinforce the economic upswing and allow domestic prices and costs to rise. It could have more long-term consequences for price-setting and wage formation. The policy rate is still below what can be regarded as an average figure over a long period of time. The question is at what pace it should be raised to a more normal level. This will in turn depend on how the economy develops,” considered Mr Öberg.
I shall here take up three aspects of flexible inflation targeting: measures of inflation, taking consideration of developments in the real economy and taking into account financial developments,” said Mr Öberg. “Monetary policy is guided by various measures of underlying inflation. There is no single measure of inflation that at each point in time indicates the proper stance of monetary policy. The Riksbank can choose to disregard effects that contribute to inflation deviating temporarily from the target. This occurs on a regular basis with regard to, for instance, indirect taxes and household mortgage interest expenditure, as well as supply shocks that are assessed as temporary. In practice, monetary policy today is mainly based on one measure of underlying inflation, UND1X,” observed Mr Öberg. “The Riksbank also takes into account developments in the real economy when making monetary policy decisions. In the preparatory works for the Sveriges Riksbank Act, it was stated that the Riksbank, without prejudice to the price stability target, should support the goals of general economic policy with a view to maintaining a sustainable level of growth and high rate of employment. If a disruption were to contribute to inflation deviating substantially from target, it is a question of judgement as to how quickly it should be returned to 2 per cent. Normally, monetary policy aims to attain the inflation target within two years.