The continued fall in inflation expectations, to a level that for Sweden is historically low, likewise suggests that inflationary pressure is subdued. Agents in markets for labour, goods and money now count on inflation being in line with the Riksbank’s inflation target in both the short and the medium term. Increased confidence in the inflation target can of itself lower the inflation propensity. The rate of wage increases to date this year indicates that the parties in the labour market are beginning to act in line with the lower expectations; the new wage settlements that have been concluded in 1997 show a downward shift in the rate of wage increases compared with 1996, towards levels that are more in line than before with the Riksbank’s inflation target. The Riksbank’s overall assessment is that in the coming two years the underlying rate of inflation will be between 1.5 and 2 per cent. Registered inflation, however, will rise by degrees with the disappearance of transitory effects that have pushed the CPI down in recent months. The registered rate will probably remain below the inflation target during 1997 and then move up towards two per cent in 1998. Against this background, in the inflation report the Riksbank considered that the monetary stance is well balanced. Forecasting inflation a couple of years ahead is, as everyone appreciates, a very difficult matter. So there is good cause to be humble. In the inflation report we have highlighted a number of factors that may cause inflation to follow a different path.
The crucial factors for this are quite different, such as capital formation, demographic trends, advances in technology and education, how the economy functions, etc. Some scope for stimulating the economy may exist in the short run but this presupposes an established confidence in economic policy’s commitment to price stability. If economic agents have doubts about economic policy, attempts to stimulate demand will be liable to elicit an upward shift in the rate of inflation that is expected by firms, households, trade unions and others. Wages and prices may then start to chase each other as they did in the 1970s and 1980s. The longer market rates of interest, which the Riksbank can influence only marginally, will begin to move up and the ultimate effect on demand may be the opposite of what was intended. The outcome may be a combination of low growth and high inflation. Much accordingly depends on the confidence that the price stability policy enjoys. In an economy where a low inflation policy is firmly established, it is easier to lower the interest rate without eliciting uncertainty about monetary policy’s long-term commitment. There is, quite simply, more room to manoeuvre. But this does of course presuppose that the outlook for future inflation condones such a policy. Independence and accountability The institutional framework for monetary policy is important for underpinning confidence in long-term economic policy.