The relationship between different prices, the exchange rate and economic activity
There is a clear relationship between economic activity and the exchange rate, on one hand, and many consumer prices, on the other. This is demonstrated by an analysis made by Mårten Löf, advisor at the Riksbank’s Forecasting Division. The prices that correlate to economic activity, the exchange rate or both stand for just over 60 per cent of the total weight in the CPIF. Just over 30 per cent of the prices follow neither economic activity nor the exchange rate. These include such things as medical care and books. The rest are energy prices.
The cyclically sensitive and exchange rate sensitive prices contributed to inflation rising between 2014 and 2019. When the pandemic broke out last year, these prices quickly became subdued. The prices that follow neither economic activity nor the exchange rate instead rose clearly in 2020.
By Mårten Löf. The author works in the Riksbank’s Monetary Policy Department.