Although monetary policy is aimed at an inflation target, developments in the real economy and the labour market have considerable significance for the shaping of monetary policy. For one thing, total demand is one of the most important determining factors behind the inflation rate, and for another thing, taking the real economy into account can in certain cases mean that exceptions are made to the 1 fundamental monetary policy rule. This applies in particular in the case of supply shocks: Firstly, inflation can be allowed to be higher or lower one to two years ahead, when due to factors that are not considered to have a lasting effect on inflation, and secondly, the real economic costs of a rapid return to the target level are considered to be excessively high. For example, we had particular reason to observe certain temporary changes at the time of our most recent repo rate decision. The Riksbank believes that energy prices will fall back from their present high levels without the rise spreading to other prices. Another circumstance that affected our forecast was the crisis in Iraq, which has now become a war. The geopolitical situation overshadows the more normal inflationary risks that we usually observe. I shall return in a moment to the economic situation and give you my views of developments. Potential growth affects the Riksbank’s assessment When the Riksbank makes its assessment of inflation in the coming one to two years, we look first and foremost at resource utilisation in the economy.
The forecasts in the March Inflation Report indicate an average rate of increase in CPI inflation of approximately 1.0 per cent one year ahead and 2.0 per cent two years ahead. What inflationary risks can we see ahead? There is, of course, a risk that the higher energy prices will push up costs in other parts of the economy and thus have contagion effects. They can also affect inflation expectations and thereby wage trends. We have ahead of us wage bargaining rounds in the autumn, which will affect two million employees and will play an important role in future economic developments. The main risks for inflation below target level are connected with the uncertainty regarding international economic developments. In the euro area in particular there are problems that could lead to weaker economic developments than we are currently expecting to see. The risk spectrum for inflation is thus considered to be balanced on the whole. However, it is above all the geopolitical situation that is currently creating unease and uncertainty and poses a threat to the global economy which is very difficult to estimate. The uncertainty currently prevailing in the global economy makes it more difficult than usual to interpret various economic indicators and to predict future developments. Personally, I believe it quite possible that the consequences of the war will be both more prolonged and more costly for the global economy than is assumed in the main scenario of the Inflation Report.