We have been able to observe that it is a broad-based decline in inflation, to the extent that all major components are affected.6 Low inflation has come to be a widespread phenomenon and many countries and regions have recently reported inflation rates clearly below their targets. Inflation has fallen particularly sharply in the euro area. The fact that this happens in a situation where there is plenty of spare capacity – which is the case in large parts of the euro area – is not particularly surprising. However, the downturn in Swedish inflation is larger and has been going on for longer than in other countries. And the question is why... One possible reason, which was also discussed in an article in the latest Monetary Policy Report in February, is that Swedish companies have not been passing on their cost increases to consumers as much as is normal.7 They have thus not increased their prices to the extent that one might expect, given the historical relationships with unit labour costs and import prices faced by producers. There may be several reasons for this, but one is that margins may decline when economic activity is weak, which is also noted in the article. Current research using US data implies that price mark-ups vary positively with the business cycle.8 Another reason may be that the weak development in the euro area has hit Swedish exports hard and that this has contributed to resource utilisation being lower than normal over a long period of time.
Such effects probably leave a mark on the development of service prices, as services are not traded internationally to the same extent as goods. Increases in services prices have been small in Sweden since the end of 2012 – both compared with normal developments and compared with other countries (see Figure 2b). A further explanation for the abnormally low price increases could be expectations of an abnormally low future inflation rate. In monetary policy analysis one usually assumes that there is a forward-looking element in the pricing, as it may be perceived as costly to change prices. If one is expecting weak demand and thus low price increases in the future, one will not want to increase one’s prices very much today. Expectations of a low future inflation rate can thus become self-fulfilling and this is something we would prefer to avoid, as it makes it more difficult to attain the inflation target in the future. According to surveys of inflation expectations among money market participants, employers’ and employees’ organisations as well as purchasing managers, expectations for 1 and 2 years ahead have declined recently, which may have significance for pricing behaviour. Inflation expectations 5 years ahead are fairly well anchored around 2 per cent, but it is important that the development of the past couple of years does not continue so that the longer-term expectations also end up far from the target (see Figure 3). Figure 3.