A quite short time horizon means that substantial changes in the interest rate are required in order to achieve the objective. Such substantial changes may in turn result both in monetary policy appearing abrupt and in undesirable and significant fluctuations in growth and employment. In contrast a very long time horizon will bring greater short-term stability to growth and employment, but at the same time lead to considerable fluctuations in inflation. These fluctuations may weaken confidence in the price stability policy and lead to higher instrumental rates over time. Here monetary policy is obviously faced with a balancing problem. The more credible the policy is, the more room there is to manoeuvre in practice. There may be reasons for completely abstaining from reacting to certain inflationary impulses of a one-time nature. An example of such “one-time inflation” is indirect tax hikes. If price disruptions are judged to have merely temporary effects on inflation and do not affect expectations of future inflation, it would imply unnecessary real economic instability to prevent the price increases from having an impact on the consumer price index. Question 6: Doesn’t the Riksbank itself “talk up” inflation? Now and then the criticism is made that the Riksbank stresses the risks of inflation in the economy and is thereby guilty of “talking up” inflation.
However, of course the Riksbank does not react in a mechanical manner to a measured change in inflation expectations. The Riksbank currently monitors a number of indicators of future inflation developments and, responses to its surveys about inflation expectations are just one of many. By way of conclusion there is reason to call attention to the fact that inflation expectations to an ever greater degree are being guided by the inflation objective and not by our or others’ discussions of the risks of inflation. The signs of this are clear. The expected inflation has crept down markedly and has now been stabilised in the vicinity of the objective for most of the groups currently monitored by the Riksbank. This is a profoundly positive development, which actually facilitates the monetary policy task. (Diagram 4.