0,4 / 1,0 / 1,8  One approach to a more detailed separation of trend or core inflation from these types of transitory price effects involves looking at the various indicators of underlying inflation that have been developed at the Riksbank. Whereas annual CPI inflation in the period 1996–98 averaged 0.7 per cent, inflation as measured by UND1X, which excludes interest expenditure, taxes and subsidies, averaged 1.5 per cent. As measured by UNDINHX, which also excludes goods that are mainly imported, inflation amounted instead to 2.1 per cent. However, the latter indicator disregards a large proportion of the factors that contribute to a weaker price trend for goods in the longer run. 6. Conclusions about inflation 1996-98  ■  Inflation - measured with the CPI - was below the target and the lower tolerance limit during 1996-1998  ■  CPI-inflation has been markedly affected in all three years by transitory effects that are easy to identify  ■  Excluding more transitory price effects, inflation has been inside the stipulated tolerance interval  This review shows that in all three years (1996–98) inflation has been below the target expressed in terms of the CPI. However, excluding more transitory price effects that monetary policy neither can nor should try to counter in full, inflation has been inside the stipulated tolerance interval. I shall be returning to the reasons why price effects of this type should be disregarded in an appraisal of the Riksbank’s monetary policy.
Permanent and transitory inflation – a schematic account1 Let us now use some simplified examples to analyse how different transitory effects on inflation may arise and what they may imply for monetary policy. Note that we are now studying the direct effects on inflation and disregarding, at least in the second and third examples, the indirect influences that act in the longer run. 1  To illustrate the effects of the various shocks on the picture of inflation as measured with the various indexes, rules of thumb have been used in each example. In practice, a monetary policy situation may also include aspects that prompt the Riksbank to take other effects of its policy measures into account. 5  BIS Review 61/1999  7. Permanent and transitory inflation A schematic account Initial position  4  International slowdown. With unchanged repo rate inflation 2 years ahead drops to 1%. CPI and UND1X then 3 coincide. Repo rate cut by 2 p.p. The economy picks up and UND1X inflation returns to 2%. UND1X  2  CPI  However, the repo rate cut means lower house mortgage 1 expenditure; approximate effects: -1.2 p.p. after one year, -0.4 p.p. after two years 0 and some tenths in the 0 following year. Forecast  1  2  3  Example 1: an economic slowdown Assume that international economic activity suddenly falters. This will affect the economic situation in Sweden.