Why has inflation been so low? Let me now go on to address the factors behind the current inflation rate. The gauge that the Riksbank has chosen for its inflation target, the consumer price index (CPI), measures the price of a basket of goods and services for household consumption. On average, the rate of increase of the CPI has been 1.4 per cent1 from 1995, when the inflation target was introduced, through 2004 (Chart 1). The CPI is the broadest index that we use and includes the effect of our interest rate adjustments on mortgage interest expenditure. The fact that average CPI inflation has been so low is due in large measure to the Riksbank’s rate cuts in the mid-1990s, when confidence in the inflation targeting policy increased. In terms of UND1X, which excludes this effect, inflation has averaged 1.8 per cent over the same period. UND1X inflation has in actual fact guided the Riksbank’s monetary policy for a large part of the current period and is thereby also an important inflation measure when evaluating policy. In recent years, however, inflation has been markedly lower. Since May 2003 it has averaged 0.8 per cent according to the CPI. The substantial monetary easing that began at the end of 2002 and continued through 2003 and 2004 has held down households’ interest costs and thereby contributed to the low CPI inflation. But inflation has been below target in terms of UND1X as well; on average it has been 1.2 per cent over the same period.
Technology-driven innovation in the financial sector has a long history ranging from the development of double-entry book keeping, to the establishment of modern payment systems, and the more recent introduction of complex asset markets and retail financial products. Thus it seems that the emergence of fintech is only the latest wave of innovation to affect the financial industry. Then, why is fintech getting increased focus nowadays? In fact, in the last decade, a radical change has occurred in the way in which technology is used leading to proliferation of new financial products offered outside the banking system, which has brought significant competitive pressure on banks as traditional players, and created environment in which disruption can happen extremely quickly, thus urging traditional players to adjust faster to maintain market share. There are a couple of other factors that have contributed to proliferation of financial innovation besides the advancement in technology itself. Changing consumer behaviour, especially by trendy millennials, is by far the biggest driver, on the demand side. They want to engage in their own way with financial services providers, who must respond to changing demands, or risk being disrupted by entrepreneurial innovators. In a recent global study, the World Bank reported that COVID-19 is accelerating change across the board on how people interact with financial services.