Economic Commentary: Price index for the inflation target
Date
14/04/2016
In this Economic Commentary, the authors discuss the choice of target variable for monetary policy in Sweden and the different measures of inflation: CPI, CPIF and HICP.
Since 1993, the Riksbank's target variable has been the annual change in the consumer price index (CPI). However, CPI has drawbacks as a target variable, as changes in the policy rate have direct and relatively immediate effects on CPI, which moves in the 'wrong direction': in the short term, a policy rate increase leads to higher inflation and a cut to lower inflation.
This presents difficulties in the communication of monetary policy, makes international comparisons of the progression of inflation more difficult, complicates evaluations of target fulfilment and risks reducing confidence in the inflation target.
Although these problems are not new, they have increased in the past few years as the repo rate has varied a great deal around a low level. Out of existing main indexes, CPIF and HICP are natural alternatives to CPI as target variables. CPIF and HICP are fairly similar in terms of outcome. CPIF is probably better known in Sweden than HICP, while international comparability might speak in favour of HICP.
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