That is only to be expected when the krona has fluctuated markedly, besides being clearly under-valued on the whole in recent years. Differences in inflation and growth could previously explain most things In a longer perspective there are explanations for a large part of the krona’s depreciation. In the past three decades the nominal exchange rate has weakened about 90 per cent. More than half of this deterioration can be attributed to the higher inflation in Sweden compared with the rest of the world in the 1970s and ’80s. Mostly of the remaining part of the real deprecation can be explained in terms of relative GDP growth and worsening terms of trade in the same period. But neither of these two factors is relevant to the period since 1992 with a flexible exchange rate: inflation, growth and terms of trade have been at least on a par with the rest of the world. Various flows may have played a part in the short run. Looking back, it is evident that export growth and rapidly rising Swedish share prices may have contributed to the high exchange rate with the euro twelve to eighteen months ago. During the past year the opposite has applied. Another factor has been large investments in foreign shares when earlier barriers to risk diversion were removed from the pension system. In September there was also general financial unrest. However, variables such as these have proved to be of little value for forecasting.
Judging from the various indicators of inflation BIS Review 89/2001  1  expectations, on the whole we seem to have been successful (Diagram 1). Although inflation has actually fluctuated markedly, for a number of years money market players, for example, have counted on future inflation being approximately 2 per cent. Neither have they been greatly mistaken. Since we began to target inflation, the rate measured by the CPI has averaged 1.3 per cent, while UND1X inflation has averaged 1.8 per cent. 1. Inflation expectations among money market players Per cent 5  5 Jan 95  4  4 Mar 00  3  3  Feb 96  Feb 97  Sep 01  2  2 CPI Feb 98  1  1  Sep 00  0  0  -1  -1 94  95  96  97  98  99  00  01  02  03  04  05  06  Sources: Statistics Sweden and Prospera Research AB  If we have anything to reproach ourselves for, perhaps it is that, despite our efforts to the contrary, we seem to have induced many segments of society to believe that we can fulfil the target, if not always then almost so. That is evidently not the case. Inflation fluctuates, sometimes a lot. The same seems to apply in most other relatively small countries. Compare inflation in, for instance, the individual euro countries with the average rate in the European Union.