Ohlsson: Underlying inflation – for better or for worse

The reason why central banks are interested in underlying inflation, or core inflation, is that we policymakers need to take into account all of the available data on economic developments and regard them from different viewpoints. The problem is that if we talk too much about other measures of inflation, those around us may believe that we have changed target variable. It is a difficult balancing act. This was said by Deputy Governor Henry Ohlsson today, speaking at a meeting of the Swedish Society of Financial Analysts.

Date: 13/05/2019 12:30

Speaker: Deputy Governor Henry Ohlsson

Place: Ohlsson: Underlying inflation – for better or for worse

When central banks assess price movements, they look at lasting changes in prices in general.  It is therefore reasonable to try to calculate measures of inflation that distinguish temporary price changes on individual products from more lasting price changes covering several goods and services, continued Mr Ohlsson.

Henry Ohlsson pointed out that a measure of underlying inflation needs to fulfil certain criteria, have certain properties, to be useful: it should for instance have the same average as the target variable, but a lower volatility and it should be forward-looking. There is no measure that is unequivocally better than all the others, but there are a couple of measures that are clearly better with regard to forecasting ability, for instance.

It is important for the Riksbank to explain the reasons for the monetary policy conducted. “Here a conflict arises between on the one hand bringing forward various underlying measures and on the other hand being clear and transparent about the objective of monetary policy. We don't want people thinking we have shifted focus in our monetary policy,” emphasised Mr Ohlsson.

“For my part, I manage the balance by always including CPIF inflation in speeches and presentations on monetary policy. When I have included underlying measures, they have never been alone. This has been my way of emphasising that it is CPIF inflation – and nothing else –  that is the target for monetary policy”, he concluded.

Updated 13/05/2019