GDP slowed from rates of 3 to 4 per cent in recent years to between 1 and 1.5 per cent in the first half of this year. At the same time, since last year the krona has weakened around 15 per cent. These two forces have pulled the Riksbank’s inflation forecasts in slightly different directions at different times in the past year. Roughly speaking, with a given potential growth rate, inflation tends to be subdued when economic activity slackens, while a weak exchange rate pulls in the opposite direction and may lead to higher price increases: directly through rising import prices and indirectly by stimulating activity via export production. In addition, sudden exchange rate movements can affect inflation expectations. Here I should like to be precise and a little formal and say that it is neither the current economic situation nor the current exchange rate that constitutes the starting point for the Riksbank’s comprehensive inflation forecast and monetary policy. What we use instead is an assessment of the future economic situation and an opinion about the exchange rate’s future path. But if economic activity slackens suddenly and unexpectedly, it does tell us something about the strength of the cyclical path and the probable future course. The same applies to the exchange rate.
At the same time, households adjust their consumption, not least of capital goods, to a more realistic assessment of income’s long-term trend. Seen in the context of innovations, there is no ready-made pattern for either the occurrence of a cyclical downturn or how quickly it can be reversed. A third basic insight from the Austrian school concerns economic policy’s limitations. If a leap forward in technology leads to a period of unsustainable growth of investment and consumption, there is bound to be a recoil. As argued in the 1970s not least by Fredrich Hayek, perhaps the foremost of the Austrians and a Nobel prize-winner, the necessary adjustment after a supply shock cannot be avoided by trying to bridge the trough with measures of economic policy. As an adjustment to more realistic expectations must come, a bridging policy will simply postpone it and presumably make it more difficult when it eventually happens. But history also teaches us that after a period of what I would call growing pains, optimism about the new technology’s potential will be restored in a more orderly and realistic form. Neither the sudden downturn in the global economy nor the terrorist attacks on 11 September should have changed the grounds for a positive appraisal of the new technology in the somewhat longer run. Signs in the summer of stabilisation in the United States During the summer there were signs that economic activity in the rest of the world was becoming more stable.