Erik Thedéen: Reflections on the high inflation in recent years

Several reasons for the sharp rise in inflation

In his speech, Mr Thedéen emphasised that the sharp rise in inflation in recent years was the result of a combination of factors. "The upturn was partly due to a series of global supply shocks that led to sharp cost increases for companies, and partly due to a large pent-up consumption need among households after the pandemic, and thus high demand. Together, these factors in turn contributed to a change in the nature of companies' pricing behaviour. This manifested itself in more frequent price increases and a greater pass-through from cost increases to price increases," observed Mr Thedéen.

There are now signs that pricing is normalising and that price increases at the producer level have decreased. But Mr Thedéen noted that this does not automatically mean that old relationships apply again. “We now know that inflation is by no means ‘dead’, as it was sometimes labelled when inflation was below the central banks' inflation targets for a long period. The threshold for raising prices may be lower now than it was before. For monetary policy, it will be important to monitor price-setting indicators. The Riksbank has also started to make greater use of scenarios that focus on the possible consequences if developments do not follow old relationships.”

Unexpectedly good resilience so far, especially in the labour market

Mr Thedéen also referred to developments in the real economy and said that the aim of the Riksbank's interest rate increases has been to bring inflation back to the target within a reasonable time without slowing down economic activity unnecessarily.

"While it is possible that we have not yet seen the full impact of the rise in interest rates on the labour market, the Swedish economy as a whole has been surprisingly resilient so far. Interest rate-sensitive parts of the Swedish economy have of course been affected by the rate hikes. Household consumption has declined and residential investment has fallen sharply. But at an aggregate level, this has been offset by the relatively better performance of other parts of the economy. An important factor behind the resilience has been the high demand for labour. This may reflect the fact that companies have not anticipated a deep or prolonged downturn in economic activity and that real wages have been weak.

“As global shocks have subsided and tight monetary policy has dampened demand, inflation has now fallen and is close to 2 per cent. This creates the conditions for favourable economic development in the long term for Swedish households and companies. There are some questions about what has happened to the structural economic relationships after the years of high inflation and, as always, there are risks of worse developments ahead. But so far, a 'soft landing' seems to be within reach," concluded Mr Thedéen.