The moving of manufacturing and services to other countries need not mean higher unemployment and lower growth if innovative forces are equally strong in the country from which the jobs are disappearing. In addition, flexibility in the labour market needs to be good. Measures to facilitate for the labour force to move between sectors are crucial, in order to avoid long-term unemployment, for example. Skills development and retraining opportunities must be offered to those losing their jobs in the sectors that are closing down. The adjustment process can be painful for those involved, but structural change is also a positive force. Lower costs and productivity gains enable investment and employment opportunities to move to other, more refined products and services. Old sectors or companies that are pushed out of the market create scope for new employment in areas where the country concerned has a comparative advantage or within domestic services production that does not compete to the same extent as the manufacturing industry. It should also be borne in mind that many rapidly-growing low-cost countries like China will probably increase their imports as much as their exports. What can we offer these countries in the future? The areas where we have comparative advantages contain future export potential and employment opportunities. Monetary policy challenges The fact that prices of imported goods have tended to be lower than we had earlier expected over a period of time raises the question of what measure of inflation we should concentrate on.
By influencing demand in the economy, we try to steer inflation 1-2 years ahead towards the target of 2 per cent. However, we conduct what is known as flexible inflation targeting. The Riksbank can choose to disregard effects that contribute to inflation deviating temporarily from the target. This occurs on a regular basis with regard to, for instance, indirect taxes, household mortgage interest expenditure, or supply shocks that are assessed as temporary. In practice, monetary policy is now primarily based on a measure of inflation, UND1X, which is adjusted for mortgage interest expenditure and the direct effects of changes in indirect taxes and subsidies. Moreover, if a shock should contribute to inflation deviating substantially from the target two years ahead, an assessment is made of how quickly it should be returned to target, in order to avoid unnecessary fluctuations in the real economy, that is, growth and employment. The Riksbank published a clarification of monetary policy in 1999, which repeated the original target wording but also made clear how these temporary effects would be managed, as well as substantial deviations from the target. Why an inflation target? The main purpose of introducing a price stability target was to break the pattern of inflation shocks, devaluation and poor real growth. If we look further back in time, periods of economic prosperity appear to have been connected with a low, stable inflation rate (Figure 2). Price stability does not only provide better and more secure conditions for making economic policy decisions.