For instance, a central bank cannot prevent oil prices rising in the wake of the concern over a possible war in the Middle East. On the other hand, a central bank could of course try to quickly tighten demand in the country to push down prices in other areas and thus ensure the average rate of price increase remains in line with the target level. The focus on inflation 1-2 years ahead, entails monetary policy being conducted gradually, little by little, rather than a constant acceleration and braking, which would risk creating unnecessary variations in demand and which could in turn have a negative effect on production and employment. The focus on the coming 1-2 year period thus means that temporary rises or falls in the inflation rate can be tolerated. However, it is important that the Riksbank is clear in its communication of whether it considers the rise to be temporary and when it expects it to subside. One-off shifts in price levels can have a more lasting effect on future inflation if, for instance, those involved do not believe that the rise is temporary, assessing that it will be lasting and thus wishing to compensate for the upturn. If this occurs, monetary policy must be used to intervene, even if the economic situation in itself does not provide cause for concern with regard to inflation, to prevent inflation taking a hold through expectations.
The reason for this is quite simply that it is more costly in terms of reduced production and employment to force down inflation expectations once they have become established at a higher level rather than to prevent them rising. Parallels between the current situation and 2001 plus 2002 Let us take a look at the current situation and begin with the price rises. Now, as in spring 2001, inflation has risen as a result of temporary factors pulling up the general level of prices. During 2001 mad-cow disease and foot-and-mouth disease pushed up meat prices and poor harvests led to soaring prices on fruit and vegetables. Then as now there was also a water shortage in the hydroelectric power companies’ reservoirs, which pushed up electricity prices. At the moment, it is electricity and oil prices that are soaring and have pushed up inflation figures above the target level in January. This becomes particularly clear if one separates energy prices from the inflation figures for January (Diagram 1). The Riksbank’s assessment is that the upturn in inflation is temporary, as it was in 2001, and we can expect to see lower inflation as early as the late spring and summer. However, our assessment is based on the assumption that those setting prices will not try to compensate themselves for the temporary price increase. If this occurs, there is a risk of inducing tendencies towards an inflation spiral, which the Riksbank could not stand by and witness in silence.