Four times a year the Riksbank presents a more comprehensive account; at present we are working on this year’s first Inflation Report. Let me remind you that for those who are interested, these reports are easily downloaded from our website: www.riksbank.se. Perhaps I should add that in addition to the text, the site provides the equally relevant statistics behind the charts. Two routes for a central bank Any central bank with an explicit target is faced with a choice that in its most extreme form looks something like this: either aim to keep inflation continuously on target or admit that there will be deviations that may last for quite some time. If inflation is to be kept close to the target all the time, there will be a constant need for sizeable repo rate adjustments, with the attendant marked fluctuations in market interest rates, output and employment. If temporary deviations from the central bank’s target are tolerated, on the other hand, monetary policy can be implemented more smoothly. A gradual adjustment of output and employment ultimately brings inflation back into line with the target. Both these routes have their drawbacks. Negative effects on employment and output from major changes in the repo rate are liable to erode public confidence in the central bank and the monetary policy regime. At the same time, undue acceptance of large deviations from the inflation target may weaken the target’s credibility and lead both to rising inflation expectations and to high costs for ultimately bringing inflation back on target.
Suppose such a price shock occurs in a particular month; it will then leave its mark on the annual inflation rate in the coming year and then drop out of the statistics. As we normally count on a time lag of more than a year before monetary policy has its full effect on inflation, countering such temporary price impulses is both difficult and not particularly meaningful. Monetary policy accordingly focuses instead on the forecast of inflation one to two years ahead. Occasional shifts in the price level can, however, affect inflation prospects more permanently if they alter the general perception of inflation’s path in the longer run. To put it briefly, if temporarily high inflation induces a general belief that inflation will also be high in the years ahead, then monetary policy must intervene. Even if the economic situation as such does not give grounds for worrying about inflation, in such a case resolute action may be called for so that the higher inflation does not become entrenched via inflation expectations. This is quite simply because, in terms of decreased output and employment, preventing inflation expectations from rising is less costly than pushing them down once they have become established at too high a level. BIS Review 15/2002  1  These, then, are the types of assessment from which we, as members of the Riksbank’s Executive Board, form a picture of the prospects for inflation. We look at them from various angles, consider the risks and opportunities.