Why has inflation been so low? Let me now go on to address the factors behind the current inflation rate. The gauge that the Riksbank has chosen for its inflation target, the consumer price index (CPI), measures the price of a basket of goods and services for household consumption. On average, the rate of increase of the CPI has been 1.4 per cent1 from 1995, when the inflation target was introduced, through 2004 (Chart 1). The CPI is the broadest index that we use and includes the effect of our interest rate adjustments on mortgage interest expenditure. The fact that average CPI inflation has been so low is due in large measure to the Riksbank’s rate cuts in the mid-1990s, when confidence in the inflation targeting policy increased. In terms of UND1X, which excludes this effect, inflation has averaged 1.8 per cent over the same period. UND1X inflation has in actual fact guided the Riksbank’s monetary policy for a large part of the current period and is thereby also an important inflation measure when evaluating policy. In recent years, however, inflation has been markedly lower. Since May 2003 it has averaged 0.8 per cent according to the CPI. The substantial monetary easing that began at the end of 2002 and continued through 2003 and 2004 has held down households’ interest costs and thereby contributed to the low CPI inflation. But inflation has been below target in terms of UND1X as well; on average it has been 1.2 per cent over the same period.
This is partly because electricity prices rose to record-high levels at the turn of the year 2002-2003 and then fell back somewhat. We judged that to be a temporary effect and predicted that electricity prices would fall back, thus bringing inflation figures down again. For both CPI and UND1X inflation this meant that the change in relation to the  1  Inflation measured according to the method for computing the CPI that was used up to the end of 2004. The analysis in the rest of the discussion is based on the new CPI method, though  2  BIS Review 25/2005  corresponding month a year earlier dropped sharply at the beginning of 2004 – an effect that was partly expected, as I was saying. But excluding energy prices, too, inflation since the beginning of 2003 has been very low, with non-energy UND1X averaging 0.9 per cent. There are many reasons for that, but the most important is unusually low import prices and surprisingly high domestic productivity growth. Allow me now to discuss this in a little more detail. One way to do so is to look at the developments in different components of the CPI. As a first step, the CPI can be broken down into prices of goods and services. I then choose to exclude oil, electricity and mortgage interest, which we already know has contributed to the low CPI inflation. Goods prices (Chart 2) rose weakly in 2003, but since the end of the same year they have been falling.