Low inflationary pressure thanks to real and structural factors

Low inflationary pressure thanks to real and structural factors Extract from Mr Urban Bäckström's address to the FOREX meeting on March 20th In recent years a comparatively high rate of economic growth in Sweden has been combined with the maintenance of low inflation. A major factor here has been the surplus capacity that existed after the recession in the early 1990s. However, the capacity surplus that existed and still exists is not the only explanation. Another factor is the economic changes of a more structural nature. Not the least of these is the introduction of an explicit inflation target and the effect this can be presumed to exert on price and wage formation. Economic agents now count on a low rate of price increases and this influences their behaviour. International competitive pressure also seems to have grown, for instance as a consequence of it being more feasible to locate even comparatively advanced production processes to countries where wages are considerably lower than in the western economies. This is, strictly speaking, a matter of one-off effects but the increased competition can continue to influence global inflationary pressure for a long time. Expanding international trade, deregulation and the European economic and monetary union are all working in the same direction. The low international inflationary pressure has indeed helped to keep import prices down. Together with a continued capacity surplus in the Swedish economy, in recent years the structural changes have resulted in low inflation. This is the case even when factors with just a transitory impact on inflation are excluded. In February this year the 12-month rate of CPI inflation was -0.2 per cent and the underlying rate of inflation, measured as UND1X, was 1.2 per cent. There are many indications that in the years ahead, inflation will remain relatively low. A continued capacity surplus and good productivity growth in the Swedish economy, together with the increased global competition, are likely to keep the rate of inflation down. ------------------------------------------------------------ Please visit http://www.bit.se for further information The following files are available for download: http://www.bit.se/bitonline/1999/03/20/19990319BIT00370/bit0001.doc http://www.bit.se/bitonline/1999/03/20/19990319BIT00370/bit0002.pdf

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The Riksbank is Sweden's central bank and an authority under the Riksdag, the Swedish parliament. The Riksbank is responsible for monetary policy with the objective to maintain price stability. The bank has also been given the task to promote a safe and efficient payment system.