Moreover, electricity and telecom prices rose for reasons that did not seem to have to do with demand. But does this analysis hold or did the increase in inflation stem — wholly or in part — from an excessively overheated economic upswing? There are also survey data that point to rising inflation expectations. But the picture is not clear-cut. 2  BIS Review 98/2001  ·  Secondly, the picture may be upset by the weak exchange rate. In relation to comparable long-term equilibrium exchange rates, the Swedish krona is currently very weak even though there has been some appreciation from the low earlier this autumn. With the important proviso that all else is equal between the economies, by itself the weak krona could warrant considerable differences in monetary policy between the Riksbank and other central banks. ·  Thirdly, the Swedish economy is being stimulated by fiscal policy. A look at how household disposable income, after taxes and transfers, is developing this year and next illustrates this. Even with some increase in unemployment next year in connection with the economic slowdown, everything points to a sizeable increase in connection with increased public spending and tax cuts. So on the one hand we have a continuation of weak activity next year, on the other excessively high current inflation, a weak exchange rate that leads in time to a stimulation of exports, and an expansionary fiscal policy that feeds consumer demand.
What I have in mind is next year’s prospect of a relatively large increase in fiscal policy’s contribution to household disposable income, accompanied by low interest rates. An expansionary economic policy normally tends to stimulate cyclical activity, which implies that 2002 should be a fairly good year for domestic demand. However, there are at least two factors that could limit or counter this effect. One factor has to do with the lower share prices and the tendencies for house prices to stop rising and in certain cases to fall. In recent years, purchases of cars and other consumer durables have been stimulated by the appreciation of assets that feature in household wealth. Conversely, falling asset prices during the past year have tended to subdue these purchases. The stimulus from economic  BIS Review 98/2001  3  policy may accordingly be dampened or delayed as long as asset prices continue to fall. Of course, the situation will be reversed if share prices and property prices instead stabilise, or even begin to rise once again. Another factor is connected with the risks in the labour market. The redundancy statistics suggest that employment will level out or even fall next year, which may involve an attendant increase in unemployment. Households are already expressing such fears in Statistics Sweden’s surveys. Besides the direct downward effect on household disposable income, a weaker labour market may make people in Sweden more cautious when making purchasing decisions.