The blue line in the chart shows that GDP growth was markedly higher than trend growth in the latter half of the 1990s and in the period from 2003 to 2008, but that it has risen somewhat more slowly in the period following the financial crisis. When developments in output are compared with inflation, a pattern emerges. A pickup in GDP growth has consistently occurred 4–5 quarters before a rise in inflation.5 While the chart says nothing about causality, turning points in GDP growth seem to be a fairly reliable leading indicator of turning points in inflation. The path from changes in output to inflation passes through the labour market, among others. We have seen that when economic growth has picked up, unemployment6 has declined one to two quarters thereafter. The relationship between the “output gap” and the “unemployment gap” is fairly strong. This is a useful observation because GDP figures are published with a considerable lag and often subject to revision, while the unemployment data published at the end of each month are not revised. If there is uncertainty about the GDP figures – which there often may be – falling unemployment can be an indication of a recovery in economic growth. Labour market developments, in turn, affect wage growth, as illustrated by the blue line in the chart. High unemployment results in low wage growth, and vice versa. The chart shows that in periods of falling unemployment, wage growth7 moves up fairly rapidly.
Since last May, the risk of higher domestic inflation has been weighted into our decisions. Whereas the  BIS Review 19/2002  3  Swedish repo rate at the beginning of last year was lower than its counterparts in the euro area and the United States, it is now higher. Looking ahead, we have as usual not committed ourselves. What we do or refrain from doing with the repo rate will depend on the new information that becomes available and on how we assess and analyse it. What happened last year is a good illustration of the appropriateness of this approach. Neither positive nor negative surprises can be ruled out. We have to be ready to cope with that. That said, we have inflation that is relatively high, even though we count on it becoming a good deal lower in the coming six months. Resource utilisation is probably relatively high, too. The path of the interest rate will then depend – as long as inflation expectations remain in place – on how economic activity develops. If activity continues to strengthen as expected and there is no reason to reappraise the economy’s inflation propensity, it is reasonable to assume that the repo rate in Sweden will be adjusted successively upwards. This does not come as a surprise to participants in financial markets.