The Riksbank’s assessment of inflation in the latest report is based on an assumption that the rate of wage increases will be lower than in recent years. Support for this assumption can be found, for example, in recent wage statistics. The report, however, does not envisage a downward shift to, or even below, the level that has prevailed in the European Union in recent years, a shift that would make it easier for Sweden to tackle unemployment. Wage formation is primarily a matter for the labour market organisations to arrange. The level of wage increases that different segments of the economy can cope with depends, for example, on the initial profit level, together with the development of that segment’s productivity, costs and prices. For the economy as a whole it is difficult to avoid the conclusion that, if an effective reduction of unemployment is to be feasible, a rate of wage increases which equals the inflation target plus expected long-term productivity growth represents a ceiling. Lower wage increases would make labour cheaper relative to capital investment and would thereby stimulate employment. It is important to understand today’s rules for economic policy. In keeping with the situation a quarter of a century ago, when Sweden was participating in the Bretton Woods system, which was a functional and efficient arrangement with fixed exchange rates, for some years now the rules of the game have been clear.
Economic activity and inflation expectations Now for the assessment in our latest inflation report. First let me say something about the Riksbank’s appraisal of the economic situation. Demand and supply The statistics from recent months clearly point to an upswing in the greater part of the economy. This largely confirms the Riksbank’s assessments last spring. Developments to date in 1997 have been more balanced than before. Demand growth is now coming not only from exports and investment, but to an increasing extent from private consumption as well. The growth of household income has been held back for some years by the programme for fiscal consolidation. Activity has been further depressed by the need to cut spending on public activities. The fiscal withdrawal of household purchasing power is continuing both this year and next, so disposable income is largely unchanged in 1997, but will rise in 1998. After that, when the consolidation programme has been completed, fiscal policy is not expected to be as restrictive on households. Some increase in public activities can also be expected in the coming two years. After rising for some years at a rather modest rate, private consumption has picked up in the past year. Households’ expectations concerning their own as well as the national economy improved in September after a minor setback in August. Households are also more optimistic about the outlook in the labour market.