7  The main measures with a direct budgetary impact include the € State-funded discount available to all citizens on every litre of fuel purchased (from 18 April to 30 June), the existing discounts on energy taxes being extended to 30 June, the offsetting measures and direct support for the transport sector and electricity-intensive industries (amounting to € billion) and the plan to take in refugees (with a budget of € billion). Need for an incomes agreement There is an additional dimension to the response to the current situation, one that is highly specific to the present shock and of the utmost importance. Specifically, as I have explained, the attack on Ukraine has exacerbated the geopolitical tensions that were already driving steep price rises in energy commodities, the bulk of which we import from abroad. This increase in the price of imported energy amounts to a loss of income for the Spanish economy. And as I have reiterated on a number of occasions, lower income for the economy as a whole inevitably entails a reduction in its agents’ income. Against this background, these agents (essentially firms and households, but also general government) would be well-advised to internalise this reduction in national income and reach a burden-sharing agreement, so as to avoid triggering a price-cost feedback loop.
If one claims this, one is also implying that central banks and governments do not have the possibility to choose the level of the inflation target, but that this is something determined by structural conditions in the economy. Ultimately, one thus also says that inflation is not a monetary phenomenon, which does not concur with what is widely accepted today. Important to maintain confidence in the target A slightly milder interpretation is that one did not literally mean that the inflation target should be lowered, but that the Riksbank, and all other participants in the Swedish economy should accept that inflation will continue to undershoot the target over a long time to come – despite the fact that it has already been below the target for several years. The main reason would be that the expansionary monetary policy required to bring inflation up to the target would also contribute to a further increase in house prices and household debt. I have some understanding for these thoughts, but I consider that they disregard a number of important circumstances as well. I believe that above all, one underestimates the importance of maintaining confidence in the inflation target and the problems that can arise if this confidence is lost. We have lived with an inflation target of 2 per cent for more than twenty years and few would claim anything other than that it has been a good system with good results for the Swedish economy.