It is thus not only import prices, but also domestic price pressure that has increased more slowly. This could be connected with the higher productivity I mentioned. In this case, it would mean that the economy could grow at a slightly faster rate without inflation accelerating. Particularly as inflation expectations have also declined slightly. Inflation picture and monetary policy When we look ahead somewhat, we can conclude that the temporary fluctuations in energy prices, which have had a strong effect on inflation since the end of 2002 and pushed it down significantly in recent months, are expected to have abated by mid-2005. As Swedish and international economic activity improve, price pressure is also expected to increase. However, in the main scenario inflation is expected to be below the Riksbank’s target both one and two years ahead, mainly due to lower wage cost increases and improved productivity growth. During 2004 UND1X inflation is expected to amount to an average of 0.6 per cent, which is 0.5 percentage points lower than the December forecast. The corresponding figure for 2005 is 1.2 per cent, which entails a revision of 0.4 percentage points for the year. At the end of the two-year period that comprises the main focus of the forecasts, inflation according to UND1X is expected to be 1.6 per cent, on the assumption of an unchanged repo rate. So what are the risks that might upset the picture I have just presented?
This is mainly due to a slightly more positive assessment of developments in the United States and Asia, but also to more favourable developments in Latin America, and central and eastern Europe. On the other hand, developments in the euro area, particularly in the larger countries - Germany, France and Italy - have been more subdued than expected and a slightly weaker development is foreseen in the near future than was previously assessed. Although international demand has developed largely as we expected, the same cannot be said for prices. The subdued international price trend in recent years has probably been linked to the earlier economic slowdown. However, there are also other explanatory factors. One possible cause of the weak price pressure is the globalisation of trade and production patterns that has followed in the wake of deregulation and the spread of information technology. Many new markets are being integrated into the global economy, including countries in central and eastern Europe and Asia. We are now seeing weak international price trends for manufactured goods, while there is a sharp rise in commodity prices. This could also be at least partly due to changed international patterns in production and trade. The best example of this is China, with its huge size and rapid industrialisation. The country is now one of the world’s largest commodity importers, particularly crude oil, copper and certain agricultural products.