Jansson: Interaction benefits economic developments

"Just over a year ago, when we had had a long period of low inflation, there was some talk about the allocation of roles in macroeconomic policy, and that fiscal policy should play a more active role. However, interaction between different agents in the economy is equally important when inflation is too high.” These were the words of Deputy Governor Per Jansson today, when he spoke at a breakfast meeting arranged by Swedbank.

Date: 09/12/2022 08:30

Speaker: Deputy Governor Per Jansson

Place: Swedbank

From low to high inflation

“A lot has changed in a year. Inflation has risen substantially around the world, and central banks have raised their policy rates quickly and quite a lot. As recently as the beginning of this year, Swedish forecasters expected that the rise in inflation would only be short-lived, and that the Riksbank's policy rate increases would not need to be more than marginal,” said Mr Jansson.

Today inflation in Sweden is 9.3 per cent, higher than at any point during the whole period we have had an inflation target. It is about as high as in the 1970s and 1980s, when average annual inflation was above 8 per cent.

That is not the only similarity to that period. During the 1970s, the period with high inflation began by energy prices soaring as a result of geopolitical unease and production disruptions in the Middle East, in about the same way as energy and commodity prices have now been pushed up in the wake of the pandemic and the war in Ukraine. And just as was the case then, inflation has also spread more widely in the economy.

We are up to the challenge

"Our challenge today is to prevent the inflation developments of the 1970s and 1980s being repeated through today’s high inflation becoming entrenched in the expectations of the economic agents. One reason why this was the case then was that economic policy did not counteract developments sufficiently well. But as things look different today, the conditions for meeting that challenge are good,” Mr Jansson continued.

Firstly, Swedish economic policy frameworks have changed. The task of monetary policy is no longer to defend a fixed exchange rate, but to keep inflation low and stable. There is also strong political support for the inflation target, which, in turn, is based on the conviction that the economy works better with a specific, low and stable inflation rate.

Secondly, Swedish wage-formation works in a completely different way now. As the manufacturing industry sets the “benchmark” in the wage negotiations and thereby steer the development of wage costs throughout the economy, we have a brake in the system that reduces the risk of price-wage spirals.

Thirdly, this time central banks have acted both relatively early and in unison, and this should mean that the opportunities for dampening global inflation are good.

Interaction important even when inflation is high

There is no doubt that the Riksbank has the tools to bring inflation back to the target. When it comes to the possibility of raising the policy rate, there is no upper bound in the same way as there is a lower one. The difficulties in bringing inflation back to the target have more to do with how quickly this can reasonably be achieved. "Economic agents need to interact regardless of whether inflation is too low or too high. The better the interaction, the smoother the slowdown in inflation will be,” concluded Per Jansson.

Updated 09/12/2022