But if activity were rather to show signs of freshening, there is a risk of the existing high inflation continuing and being incorporated in our  2  BIS Review 15/2002  perceptions of inflation in the longer run, with possible effects on, for example, future wage negotiations. That of course must not happen. A scrutiny of the current cyclical picture reveals a growing number of signs that activity abroad, above all in the United States, is on the way to improving. This is something that also affects conditions for the Swedish economy. A majority of leading indicators point in that direction. Although the upward phase does contain risks to which I shall be returning, there is still a good deal of evidence that a recovery in the rest of the world as well as in Sweden may be on the way to materialising later this year. A factor that often contributes to a cyclical swing is movements in stocks. When stocks are plentiful and sales are falling, firms often cut back production so that this falls more than demand. In this way, stock adjustments initially accentuate the cyclical downturn. When the reduction of stocks ultimately comes to an end, firms may step up production again even though demand has not yet started to recover. This drives a cyclical upturn and perhaps it is just such a positive effect that may be on the way. There are signs of this in the United States in particular but also in Sweden.
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.