Inflation in the past twelve months In the third Inflation Report last year the Riksbank’s growth forecast for Sweden in the coming years was revised upwards. This mainly mirrored a more favourable outlook for international activity; it also seemed likely that domestic demand would be stronger than had been expected earlier. Our overall growth forecast agreed with most other observers. Some predictions, however, did include an even stronger increase in household consumption, the reason being that rising asset prices in general and the stock market boom in particular were judged to lead to a markedly increased consumption propensity. Our higher growth forecast was accompanied by little change in the assessment of inflation we had presented earlier in the year. Thus, we judged that the relationship between growth and inflation would be more favourable than we had previously calculated. In this respect we differed from many other observers and that occasioned a good deal of discussion. The background to our forecast was that inflation’s path had been surprisingly favourable and that, instead of being just a result of occasional factors, this had to do with more fundamental features in the economy that would continue to influence inflation up to our two-year horizon. Here is a picture of our inflation assessment last October and the outcome (Chart 1). I have chosen to present it in terms of UND1X because that is the indicator of inflation on which monetary policy has been focused in the past year.
But even with a growth rate of just over 3%, the Swedish economy would be expanding more rapidly than we believe it is capable of in the longer run. Econometric estimates of the output gap. Per cent of potential GDP 4  4  2  2  0  0  -2  -2  PF HP UC  -4  -4  -6 -8 1980  -6 -8 1984  1988  1992  1996  2000 Source: The Riksbank  Let me conclude by underscoring what I mentioned initially, namely that forecasting inflation proved difficult in the 1990s, in Sweden as well as elsewhere. There have been substantial changes in our economies, partly because policy now focuses on stability and competition has become stronger in various ways. Inflation in Sweden has been a positive surprise in recent years even though activity has been rising strongly, so further positive surprises should naturally not be ruled out. Still, there are now many indications that resource utilisation is relatively high and will go on rising. That implies that, little by little, inflationary pressure will grow. We will be presenting a comprehensive assessment of inflation prospects in the December Inflation Report. In that context we will also be deciding the repo rate. Recent developments have not altered the picture I formed in October. Although it is still too early to specify when, there will presumably be grounds for increasing the repo rate in the future. BIS Review 107/2000  6