Wage increases are based on inflation being more permanently high, and in this situation companies do not see any major problems with continuing to raise prices – a price-wage spiral like the ones in the 1970s and 1980s starts. Fiscal policy focuses on broad-based support rather than on more targeted measures. This drives up aggregate demand in the economy as a whole and contributes to the high inflation rate becoming entrenched. Here, the interaction between fiscal policy and monetary policy again becomes inadequate.10 To curb inflation, the Riksbank must raise the policy rate considerably more than we now expect.11 Since households and companies are heavily indebted, this can have very significant negative repercussions. Even in such a worse scenario, inflation will eventually return to the target, but it will take longer and be considerably more painful for everyone in Sweden. Of course, it is not necessary for all of this to go wrong to  10 An illustration of the importance of interaction between fiscal policy and monetary policy is the market reac-  tions triggered by the UK Government's proposal for a mini-budget on 23 September. The proposal was judged to counteract the Bank of England's attempts to slow down inflation and was considered not credible. Interest rates rose significantly and the pound sterling weakened significantly. 11 See the Article “Alternative scenarios for inflation and monetary policy” in Monetary Policy Report November 2022 for examples of developments if inflation were to be higher than in the Riksbank’s forecast.
Different inflation developments than forecasters expected in January Annual percentage change 12 10  12 Range of other forecasters' estimates  10  MPR Feb 8  8  CPIF  6  6  4  4  2  2  0  0  -2 Jan-20  Jul-20  Jan-21  Jul-21  Jan-22  Jul-22  Jan-23  -2 Jul-23  Note. Refers to forecasts based on outcomes for the CPIF up to and including December 2021. The range shows the dispersion between highest and lowest estimates of other forecasters. Sources: Statistics Sweden, individual forecasters and the Riksbank. Figure 2. A broad rise in inflation – not just rising energy prices Sub-index in the CPIF  Measures of underlying inflation  Note. Annual percentage change. The range in the figure on the right shows the highest and lowest outcomes among seven different measures of underlying inflation. Sources: Statistics Sweden and the Riksbank. 12 [15]  Figure 3. Policy rates are eventually determined by the global real equilibrium interest rate  Source: The Riksbank. Figure 4. Inflation as high as in the 1970s and 1980s Annual percentage change 16  16 1970-1992 Average: 8.2  14  14 CPIF  12  12  10  10  8  8  1995-2022 October Average: 1.7  6  6  4  4  2  2  0  0  -2 1970  1980  1990  2000  2010  2020  -2 2030  Note.