Since the beginning of the year, domestic inflation has edged down, hovering around 1.3 per cent. Adjusted for the reduction in day-care rates in January this year, the year-on-year  2  BIS Review 80/2006  rise in domestic prices has been 1.6 per cent. The rise in prices has been lower than expected for both goods and services. There may be several factors behind the low inflation rate. Strong competition between various producers within the food industry and construction industry may have had a dampening impact on inflation. In addition, productivity growth in retail trade has been high in the past few years. Intensified competition may also have contributed to curbing the rise in prices for banking and insurance services. Several factors point to higher inflation in the period ahead. Capacity utilisation in the Norwegian economy is rising, which will push up the rise in prices for domestically produced goods and services. A tighter labour market will probably lead to higher wage growth in the coming years. The rise in oil prices is pushing up producer input costs. Increased electricity costs may also translate into higher prices for domestically produced goods and services. Outlook for the years ahead Monetary policy will increasingly have to reflect the constraints facing some Norwegian industries. Oil prices are of importance for the activity level in the Norwegian economy and central government revenues. In recent years, oil prices have risen sharply.
In the June Inflation Report, Norges Bank assumes that money market rates among our trading partners will gradually increase over the next three years. The path for domestic and external interest rates does not imply considerable changes in the krone exchange rate. Growth in disposable income has been high in recent years. Lower interest expenses as a result of the decrease in interest rates and relatively high real wage growth have resulted in an increase in household purchasing power. The rise in house prices may also have fuelled growth in private consumption. With high growth in employment and falling unemployment, consumption growth is expected to be high again this year. Since the publication of the June Inflation Report, electricity prices have increased to a further extent than expected. Forward prices for next winter have also increased. Higher electricity prices may in isolation reduce household purchasing power somewhat. On the other hand, growth in household income is high and there are market expectations of a fall in electricity prices later next year. A continued rise in house prices may contribute to holding up consumption growth. House prices increased further this summer, and the twelve-month rise moved up to 15.8 per cent in July. Residential construction is still high. In 2005, the number of housing starts was the highest since the beginning of the 1980s. As the interest rate level gradually normalises, household interest expenses will increase. Combined with projected lower employment growth and higher inflation, this might reduce growth in household purchasing power in the years ahead.