Pros and cons of various target variables and intervals
In a study, the Riksbank discusses the pros and cons of various feasible price indices as target variables and of an interval around the inflation target.
The Riksbank has used the CPI inflation rate as the target variable since the inflation target was introduced in 1995. Ever since then, but especially more recently, the choice of target variable has been discussed. The reason for this is that changes in the repo rate – via household mortgage rates – have a direct effect on CPI inflation which has nothing to do with the underlying inflationary pressure. The effect is in "the opposite direction" in that rate cuts aimed at pushing up inflation instead lead to a further fall in CPI inflation in the near term, when household mortgage costs go down.
Natural alternatives to CPI inflation as the target variable include inflation measured in terms of the CPIF (the CPI with a fixed interest rate) or the HICP (the EU's harmonised index for consumer prices). Changing target variable to the CPIF or HICP or reintroducing a tolerance band could have consequences for how the Riksbank communicates monetary policy and builds confidence in the inflation target, but it would not change the basic features of the monetary policy being implemented.
Any changes need to be preceded by a broad and open discussion. This study is intended as a basis for such a discussion. During the autumn, the Executive Board of the Riksbank and bank officials will pursue dialogue on these issues with other authorities and organisations.