One example is the interest rate fluctuations, which have shown up in the own homes item in the CPI. During 1996-97 in particular, the CPI was relatively far below not just the targeted rate but also the lower tolerance limit. To a fairly large extent, this was because the Riksbank lowered the interest rate markedly with a view to ensuring that the target would be met a little later on. In the period 1993-98 the Riksbank tried to explain how effects of this kind would be handled. But not everyone considered the policy was sufficiently clear. The Riksdag (Sweden’s parliament), for  BIS Review 98/2000  2  example, assessed the Riksbank’s performance solely in terms of the CPI outcome even though there had been long periods when monetary policy had focused on other indicators that exclude transitory effects. In the best of all possible worlds one would prefer to use an indicator of inflation that excludes all those effects one wants to disregard. Unfortunately, there is no such indicator that suits every situation. For example, a tax increase may, under certain circumstances, need to be excluded as a transitory effect. In other cases, however, tax increases should be taken into account when formulating policy because they are a part of the inflation process. Against this background, in 1999 the Riksbank declared that in connection with every monetary policy decision, any grounds that existed for modifying the policy’s target variable would be clarified.
Over the years there has been clear evidence of this in connection with excessively high expectations in the stock market or the property market, for example. In the end, it becomes difficult to justify prices in terms of economic fundamentals. Elements of this have been apparent in recent years, for instance in the United States. One issue is whether central banks ought to consider asset prices when setting the interest rate. The notion here is that asset prices may influence the path of inflation. An increase in household wealth on account of rising share prices, for example, is likely to affect consumption and thereby demand in general and the price trend. Effects from expectations are also involved. Rising share prices may mirror expectations of permanently higher corporate profits and lead to expectations of higher lifetime incomes. If confidence in the future becomes much stronger in this way, the effects on demand may be considerable. Share price increases may perhaps affect the corporate investment propensity in a similar way. The Riksbank takes this into account as far as possible in the inflation assessment. But much remains to be done, theoretically as well as empirically, when it comes to understanding the nature of these relationships. A lively discussion is in progress, at the Riksbank as well as among those who scrutinise us, about what a given development of asset prices should imply for monetary policy. There is even less agreement as to whether central banks should conduct policy so that the development of asset prices is affected directly.