The objective of the Riksbank’s activities is to ensure that inflation is low and stable.
Inflation is when money declines in value
Inflation means that almost all prices increase and that one can buy fewer goods for the same amount of money. Money thus declines in value. The simplest way of describing this is that one always buys the same basket of goods in the shop and the total price rises, this is inflation. The most common measure of inflation is the change in the Consumer Price Index, CPI.
The target is 2 per cent
The Riksbank has chosen an inflation target of 2 per cent. There is no science that says what is the right level for an inflation target. It shall be so low that no one is concerned about it, but sufficiently high to offer a buffer against deflation, that is, falling prices, as this can create problems. This is why the Riksbank and other central banks have chosen a target of 2 per cent. From a monetary policy point of view, one disadvantage of the CPI is that it is directly affected by changes in the policy rate. These adjustments have, through their impact on mortgage rates, large and direct effects on the CPI which are not connected to underlying inflationary pressures. In recent years, with large adjustments to the policy rate, it has become increasingly difficult to use the CPI as guidance for monetary policy and in monetary policy communication. In practice, therefore, the CPI with a fixed interest rate, the CPIF, has been more important for the shaping of monetary policy than the CPI. As of September 2017, the inflation target is defined also in formal terms by the annual change in the CPIF.
