In Sweden CPI inflation has fallen from around 5 per cent in 1994 to approximately 2 per cent in 2003. Even in a more long-term perspective, inflation shows a downward trend, which is illustrated in a figure showing inflation in OECD countries. Other parts of the world have experienced a similar development. The IMF’s previous chief economist Ken Rogoff has demonstrated in an article that global inflation has fallen from 30 per cent to 4 per cent between 1993 and 2002. Which factors could lie behind this remarkable slowdown in the rate of price increase? I believe that it is mainly a combination of three factors: (1)  A change in monetary policy with independent central banks applying inflation-targeting,  (2)  IT investments enabling large-scale cost savings and  (3)  Globalisation that entails, among other things, increased competition from new low-wage countries and pressurises producer countries towards greater productivity. 1. Independent central banks with inflation targets  At the beginning of the 1990s, in the aftermath of the years of overheating and crisis, a process of reorientation of economic policy began in Sweden: the tax system was reformed and combating inflation was given priority. The Riksbank decided at the beginning of 1993 to introduce an inflation  BIS Review 21/2004  1  target, defined as 2 per cent with a tolerated deviation interval of plus/minus one percentage point, and fiscal policy was increasingly oriented towards budget consolidation. Similar developments took place at around the same time in many other countries.
The change in economic policy was particularly revolutionary in the former communist states in Europe, in China and in developing countries that had previously been inspired by the planned economy, such as India, which contributed to these countries becoming increasingly integrated into the global economy. The fact that price stability has become an explicit target for monetary policy has thus played an important role in the slowdown in inflation over the past decade. It is only to be expected, given that inflation is a monetary phenomenon, which is ultimately determined by monetary policy and the confidence it inspires. Independence for central banks, the convergence criteria for EMU membership and a ban on financing budget deficits by printing more money are some examples of measures that have contributed to increasing confidence in the price stability target. In addition, improved communication and increased transparency have led to monetary policy becoming more predictable and more credible. This has resulted in low, stable inflation expectations, which in Sweden have on average remained close to the inflation target in recent years. 2. Increased investment in IT  As I have already mentioned, productivity has developed more strongly than expected over the past year. Unlike the situation during the second half of the 1990s, this upturn cannot be explained by increased production of ICT goods in general and telecommunications products in particular, as these sectors have experienced a sharp fall since 2001.