One question that has been raised is whether the Riksbank should disregard imported inflation and instead focus on domestically-generated inflation. This argument is based on the assumption that as the Riksbank is unable to affect imported inflation, it should aim monetary policy towards the areas that can be influenced. Let me give a simple example of why I do not consider this viewpoint to be valid. Of course, the price in a foreign currency that a foreign producer receives for its goods is entirely beyond the Riksbank’s control. However, when the product is imported to Sweden, Swedish importers, for instance, wholesalers, have to exchange foreign currency in order to pay for the goods. In other words, monetary policy plays some role in the price in Swedish krona that the importer has to pay for the goods through its effects on the exchange rate. When the importer then wishes to sell the goods in the Swedish market, it must have a network of retailers who will sell the product. This means that Swedish costs, such as wages and rent paid for premises, also play a part in the price the retailer charges for the goods. Naturally, the demand for the product is also an important factor. In other words, the traditional supply and demand relationship in the Swedish market is important to the endprice that Swedish consumers have to pay for the imported goods.
The fact that confidence in the inflation targeting policy strengthened fairly rapidly from the mid-1990s onwards is very clear, if one examines inflation expectations during this period (Figure 4). From relatively high levels indicated in the surveys made immediately after the changeover to an inflation target, the expected inflation rate gradually stabilised at around the target of 2 per cent. Nor does it seem to be the case that price stability was attained at the cost of stronger fluctuations in the real economy than before, which was a fear expressed by some prior to the changeover. The fluctuations in the real economy appear to have declined in comparison with the decades prior to the crisis at the beginning of the 1990s, and we have had much more positive developments with regard to real growth and real wages. Has inflation been too low? During the period from 1995 to September 2005, CPI inflation has averaged at around 1.1 per cent, which is within our tolerance interval but clearly below the target of 2 per cent. However, the average UND1X inflation rate has been higher, around 1.9 per cent between 1995 and 2004, which is mainly due to interest rates and thereby also mortgage interest expenditure gradually falling during the period. During the past two years the rate of price increase measured as UND1X has been lower, on average around 0.9 per cent.