And there are examples of price and wage spirals, when expectations of higher prices in the future led to higher wage increases that eventually forced a change from a fixed exchange rate to a floating exchange rate. The inflation target was introduced in connection with this changeover. Economic agents’ expectations of future inflation are an important element in assessing the credibility of monetary policy with regard to attaining the inflation target. What is the situation today? Five-year inflation expectations among money market participants have long been close to 2 per cent. The most recent quotation available at our meeting in April was 2.2 percent on average. In May, it rose to just under 2.4 percent. Expectations have thus risen, albeit not to any alarming levels. It should also be added that the median, that is, the middle observation, is still at 2 percent. 12 [14]  It is important to point out that money market participants’ inflation expectations are not formed in a vacuum. These actors at the same time form expectations of a number of macroeconomic key variables. This includes expectations of the coming monetary policy. In April 2022, money market participants expected a repo rate of rounded 0.8 per cent twelve months ahead and a repo rate of 1.1 per cent 24 months ahead from April 2022. In May, the corresponding expectations were approximately 1.3 and 1.6 per cent. In other words, money market participants' expectations of inflation are based on the expectation of a less expansionary monetary policy.
This does not, of course, mean that the Riksbank can always sit with its arms folded when inflation rises and expect inflation to return to the target ‘by itself’. It is reasonable to assume that the fact that long-term inflation expectations are firmly anchored to the target is because economic agents expect the Riksbank to act when needed. But the fact that there is a credible nominal anchor today does of course make things easier, even though it ultimately hinges upon the way monetary policy is conducted. 11 [14]  Secondly, Swedish wage-formation works in a completely different way than in the 1970s and 1980s. One important reform was the so-called Industrial Agreement, under which the manufacturing industry has set the benchmark for wage negotiations and ultimately steered wage cost increases in the entire economy for over twenty years. The relationship between this benchmark and the inflation target has not always been crystal clear. For instance, employers’ representatives have sometimes expressed the view that the inflation target is obsolete and should not be used as a base in wage negotiations. However, this was during the extended period when inflation tended to be at the lower end of the target. However, as developments now show, we must assume that inflation will sometimes be above the target as well. Hopefully, this will further underline the importance of the inflation target as a nominal anchor for the Swedish economy, both upwards and downwards, so to speak.