In work at the Riksbank on monitoring prices in the Swedish economy, we could not fail to notice some positive changes in competitive conditions and pricing in recent years, as well as some more negative patterns that seem to be persisting. BIS Review 47/1998  -4Let me take the positive aspects first. One is the favourable price trend for imported goods in recent years. This is particularly notable in that for much of this period the exchange rate has been comparatively weak, which by itself should push import prices up. A favourable price trend has also been observed for food products, for example; this seems to be a consequence, at least in part, of Sweden’s membership of the European Union. Today, moreover, there are many indications that the combination of European monetary union and increased IT-based trade, for instance, will make competition even stronger. There is a general difference between the development of administered prices and market prices for goods and services. The administered prices have risen faster. This may be a result of increased fee setting in the public sector in recent years, both in connection with structural moves away from tax financing and to fill existing “holes” in public finances. Then there is the classic explanation that it is not so easy to raise productivity growth in some parts of the services sector. This no doubt applies in particular to a number of the services that are mainly provided under public auspices, such as medical care and care of the aged.
A consistent implementation of this policy, with an inflation target, clarifies the rules of the game for wage formation. High wage increases are liable to boost inflation, which necessitates higher interest rates. The inflationary consequences of the wage increases can be modified if productivity growth is good, as has been the case in recent years. But at least a part of this productivity growth is achieved at the expense of jobs; this is one aspect of the process whereby higher labour costs generate stronger rationalisation and maybe also an increased capital input. In this way, too, and not just because the higher interest rates directly affect demand and employment, a rapid wage rise is liable to endanger jobs. Against this background, the outcome of the latest wage negotiations is better than in earlier years. Agreements for the next three years have been concluded at levels around 3 per cent a year. It has been said that this takes wage drift into account but that is probably not entirely the case. Instead one should no doubt count on wage drift averaging around 1 per cent. The average annual wage outcome in the period 1998–2000 would then be 3.5 to 4 per cent. This does still represent some downward shift in the rate of wage increases, which in turn assists the Riksbank’s task of ensuring low inflation. All else equal, we can allow ourselves a somewhat lower level of interest rates and a somewhat stronger growth of demand.