I intend to briefly discuss both perspectives in turn and first explain why we made the decisions we made one to two years ago and how they have affected economic developments today – and then I will discuss how we use the monetary policy we conduct now to try to achieve the inflation target over the coming years. Reasons for the current low inflation rate The reasons why we misjudged inflation trends earlier are fairly easy to pinpoint now. Although some forecasters were more successful than others in their assessments, almost all made the same two mistakes; we underestimated productivity growth (and thereby overestimated resource utilisation in the economy) and we overestimated import prices. We, like many other analysts, assumed that the rate of productivity growth had increased in a number of sectors, partly due to IT investments combined with restructuring. Similarly, we knew that globalisation was pushing down import prices for many products. What we and many others misjudged was the magnitude of the changes. Productivity growth was even stronger than we had anticipated, with strong growth in the service sector, for instance, where IT use has increased. Import prices were slightly lower than we had expected, partly due to an unexpectedly high increase in the percentage of total imports from low-wage countries such as China and Poland. Consumer prices of imported goods have fallen since mid-2003. It is perhaps all too common that forecasters are reluctant to stick their necks out with regard to large underlying changes.
At the same time, the labour market has been affected by changes both within the EU and in the world economy as a whole. Asia is rapidly expanding production and exports and reduced trade barriers are increasing the degree of competition even in markets that were not previously exposed to competition. The emancipation of the countries in eastern and central Europe has dramatically increased access to labour for manufacturing in these countries and also for work in Sweden. So far the temporary labour migration has been only a small, although growing, element in the Swedish labour market. However, the pressure from the labour supply from the new EU countries is bound to increase. The amount of foreign labour entering the various sectors will depend on the initial wage differences. The new member states’ wage levels are in the process of converging with Swedish wages in the long term, but it is dangerous to assume that neither wages nor employment in various sectors in Sweden will be affected. If we assume this, there is a risk that we will not be sufficiently willing to make changes and then unemployment will rise. The Swedish labour force is thus facing competition both directly from foreign labour coming here and indirectly through households and companies choosing to buy goods and now even services that are produced abroad. Phenomena such as offshoring and merchanting can also be linked to the relatively high labour costs in Sweden.