Sveriges Riksbank Inflation Report 4th Q 2001

Summary

Inflation is currently just below 3 per cent. As the effects of lastspring's price increases for certain goods and services diminishand import prices become more subdued in connection with lower oil prices and the Swedish krona's recent appreciation, inflation will fall back and for a time be below the Riksbank's target.

Somewhat weaker demand and lower resource utilisation contribute to this. Towards the end of the forecast period there is some renewed increase in inflation, partly on account of rising commodity prices. The overall assessment, including the risk spectrum, is that inflation one to two years ahead will be approximately in line with the Riksbank's target.

The short-run prospects for growth in the rest of the world seem to be more unfavourable than assumed in the October Report. Still, the major economic policy realignment, above all in the United States but also in other industrialised countries, together with an end to stock adjustments, does point to a recovery during the forecast period. Somewhat weaker economic activity internationally and lower commodity prices contribute to a more subdued development of international export prices. Towards the end of the forecast period, however, imported inflation will become higher, mainly on account of rising oil prices.

In Sweden, too, economic policy contributes to a recovery. Tax cuts and increased transfers generate a strong increase in household disposable income. The effect of real interest rates on domestic demand is also expansionary. The krona is expected to appreciate but is markedly under-valued initially, which is one reason why exports recover during the forecast period. GDP growth has been revised downward in the main scenario and is expected to be 1.2 per cent this year, 1.8 per cent in 2002 and 2.4 per cent in 2003. With lower resource utilisation, domestic inflation is expected to be more subdued than was envisaged in the October Report. At the same time, imported inflation two years ahead is calculated to be higher. In the main scenario, CPI inflation is judged to be 2.0 per cent one year ahead and 2.1 per cent after two years, while the corresponding forecasts for UND1X inflation are 2.0 and 1.9 per cent.

The spectrum of risks is highly relevant for the formation of monetary policy. The uncertainty in the assessment has decreased since the time of the October Report but is still considered to be greater than normal. There is a risk of inflation being lower than in the main scenario as a result of weaker economic activity, both in the rest of the world and in Sweden. At the same time there is a risk of inflation being higher if inflationary pressure and the pass-through from a weak exchange rate have been underestimated. The spectrum of risks is judged to be balanced.

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