’9 ’9 7 1  1  0  0 -1  -1 94  95  96  97  98  99  00  01  S ource s: S ta tistics S we de n a n d P rospe ra R e se a rch Diagram 3  Com p on en ts of th e CPI percen tage 12-m on th ch an ge 9  9  I m p o r t ( 24 % )  6  6  D o m e s t i c ( 67 67% %)  3  3  0  0  -3  -3  -6  -6  Ho u s e m o r tg ag e i n t e r e s t c o s t ( 9%)  -9  -9  -12  -12  -15  -15 92  93  94  95  96  97  S o u r c es : S tati s ti c s S w ede n a n d th e R i k s ba n k  BIS Review 56/1997  -5-  Different indicators of underlying inflation also show a declining rate of increase, though the picture measured in this way is not quite as dramatic (Diagram 3). Excluding house mortgage interest costs, the current rate of inflation is about 1 percentage point higher than indicated by the CPI.
Under certain circumstances stock adjustments may trigger a more marked economic slowdown. This may happen, for instance, if effects of the adjustments either spread to private consumption or have a negative impact on the labour market and household confidence. The Riksbank was therefore alert to the risk of private consumption being weaker last spring and summer, which would have pointed to a further curb on inflation. In practice, however, private consumption went on rising in the summer and its growth became somewhat stronger in the autumn. Low inflation and interest rate reductions The rate of inflation decreased during 1996 and the rates that different economic agents expected in the future also moved down markedly (Diagram 2). This enabled the Riksbank to lower the repo rate from 8.91 to 4.10 per cent. As a result, the initial position for the ongoing growth phase in Sweden’s economy is more favourable than for many years. The drop in the rate of consumer price increases was appreciably accentuated by the Riksbank’s repo rate cuts in that these contributed to the reduction of mortgage interest costs. Under normal circumstances the tolerance interval around the price stability target should suffice BIS Review 56/1997  -4-  to absorb transitory effects on the price level. Last year, however, the fall in interest rates was very marked because many factors had a concerted effect that rapidly altered the picture of inflation. The magnitude of that interest rate fall is also largely responsible for the weak price trend to date in 1997.