1992 Q1 = 100  120  120 Other goods  100  100 Footwear  80  80 Clothing Audiovisual equipment  60 1992  60 1994  1996  1998  2000  2002 2003  Source: Norges Bank  The change in trade patterns has made a considerable contribution to the sharp decline in prices for clothing, shoes and audiovisual equipment. Rapid technological advances have also pushed down prices for audiovisual equipment. In Norway, competition has probably increased in the retail industry and other service sectors in recent years. Initially, heightened competition affects companies’ profit margins. But enterprises will respond by reducing their costs. This will occur in part in the individual enterprise, but subcontractors will also be required to reduce their prices and enhance efficiency. Therefore, increased competition usually triggers higher productivity growth in the economy. Low inflation may therefore be matched by growth in productivity. Chart 19. Import-weighted krone exchange rate and interest rate differential against trading partners Index Per cent 80  5  85  4  90  3  95 100  2  Krone exchange rate (left-hand scale)  1 Interest rate differential (righthand scale)  105 110 2000  2001  2002  2003  0 -1 2004  Source: Norges Bank  BIS Review 11/2004  13  The cyclical downturn last winter, low wage increases last year, fiscal discipline, an unexpected decline in inflation and prospects of low inflation have resulted in a considerable easing of monetary policy.
The MPC is  2  BIS Review 71/2004  emphatically in the first group; we agree with Sherlock Holmes, “It is a capital mistake to theorise before one has data”. Indeed, as Lord Peston, Chairman of the House of Lords Select Committee on Economic Affairs, recently observed, referring to our foot high data pack: “Statistics seem to be [the MPCs] life blood”. Why should this be so? The MPC sets interest rates in response to its assessment of the outlook for economic activity: the key question is whether the level of aggregate demand is above or below the economy’s capacity to supply. The difficulty - and it is a fundamental one - is that we cannot observe the true values of many key macroeconomic variables, such as aggregate demand. Of course, the Office for National Statistics (ONS) produces estimates of such variables. These are derived from comprehensive surveys of firms and households, and provide the most authoritative available guide to macroeconomic developments. But measuring economic activity across the whole of the UK is a hugely complex and difficult task, and 100% accuracy is simply not feasible. And producing reliable estimates takes time. If the ONS waited two or three years before publishing their first estimates, they would have reasonably complete information. But it would be of rather limited value for policy purposes. We need more timely indicators of economic activity, even though these will tend to be less accurate than later estimates.