The development of real wages shows how much of the wage increases are left when a deduction is made for inflation. Real wages have increased by an average of 2.5 per cent since 1995, while they did not increase at all during the 1980s (see Figure 15). In real terms, wages have thus developed much better over the last 15 years than during the 1980s. The third area relates to inflation and monetary policy. Monetary policy was also changed in the light of lessons learned in the past, in this case during the periods of high inflation in the 1970s and 1980s. An explicit inflation target and an independent Riksbank have had a positive impact. Inflation has been low and stable since the mid-1990s and has largely been in line with the target (see Figure 16). The success of the inflation-targeting policy is also linked to the fact that fiscal policy and wage formation have been much more effective since the mid-1990s. We have thus learned from the past, and as a result Sweden’s economy is well equipped to meet the future. It is important that we make the most of this strong initial position in the period ahead, and monetary policy must of course play its part in this. So, what course can we expect development to take in Sweden in the future, and how can monetary policy help to smooth the way?
First, our forecast presupposes that it will be possible to manage the debt crisis in Europe so that the acute problems can be resolved. There is a risk that the problems will continue and that the debt crisis in Europe will get worse, which may lead to weaker economic activity in Sweden and abroad. If this proves to be the case, monetary policy in Sweden will have to be more expansionary to mitigate the effects of the more severe crisis. Conversely, it is possible that political agreements will be reached fairly soon and that the financial unease will subside more quickly than we expected. This could lead to stronger economic activity in Sweden and abroad than expected, and it will then not be necessary for the repo rate to be so low. Secondly, the outcomes for inflation abroad have been surprisingly high recently, despite falling commodity prices and weaker economic activity. There is therefore a risk that the situation abroad will be characterised by economic stagnation and high inflation, so-called stagflation. Central banks abroad may then be faced with a very difficult balancing act. The risk of further weakening economic activity will reduce the scope for raising policy rates to  6  BIS central bankers’ speeches  combat inflation, which may result in inflation continuing to be high. All in all, there is therefore a risk that inflation abroad may not fall to the extent we expect. This will lead to higher inflation in Sweden too through higher import prices.