In New Zealand, the inflation target is formulated as growth in the consumer price index, but the mandate specifies factors for which adjustments may be made. These factors include price changes due to substantial changes in commodity prices, changes in indirect taxes, considerable changes in economic policy which directly impact prices, as well as natural disasters. There are no continuous, fixed indicators that make adjustments for these factors, but adjustments are made if the effects are substantial. In Sweden and Canada, the inflation target is formulated as growth in the consumer price index without special exclusions. However, in practice, indices for underlying inflation are used in the implementation and assessment of monetary policy. Sweden’s Riksbank often refers to an indicator that adjusts for the direct effects of interest rates and net indirect taxes. The Bank of Canada has now defined a new indicator as the operational target of monetary policy. This indicator is the consumer price index excluding the eight most volatile components: fruit, vegetables, petrol, heating oil, natural gas, domestic air travel, tobacco products and interest rate costs. Adjustments are also made for the effect of indirect taxes. The consumer price index is compiled to show developments in the cost of living. To some degree, the consumer price index overestimates developments in the cost of living. This is partly related to the fact that the measurement method does not adequately capture quality changes in the service industry.
Under framework conditions of this nature, it will not be very fruitful to provide detailed estimates of the various demand components in the economy. In some cases, the inflation projection itself may lose some of its informational value. In the UK, there is at times greater interest for the uncertainty surrounding the projection, illustrated by the fan charts, and in the minutes of the monetary policy meetings, than in the inflation report and the actual inflation projection. Detailed projections may increase the possibility of checking the consistency of projections over time. They also provide a basis for evaluating whether short-term indicators are in line with the developments expected by the central bank. On the other hand, very detailed projections may suggest that the central bank is more certain about developments than there is actually reason to be. Norway  BIS Review51/2001  9  has a long tradition of making detailed forecasts. Economic agents know from experience that point forecasts are very uncertain and presumably regard them with a healthy scepticism. The analysis and projections in the Inflation Report are conditional on a number of economic variables such as fiscal policy, exchange rates and the interest rate. A different trend in these variables could also result in a different course for both the real economy and nominal developments. The assumptions on which the inflation forecast is based must be reasonable and fairly realistic if the forecasts are to function as a basis for decision-making.