Flodén: The low rate of inflation – should we be worried and can we do anything about it?
Too low inflation over a long period of time is worrying, as it creates problems for the effectiveness of monetary policy and for wage formation ant the functioning of the labour market. However, monetary policy has every opportunity to attain the inflation target of 2 per cent. These comments are made by Deputy Governor Martin Flodén in a speech held at SACO (the Swedish Confederation of Professional Associations).
Mr Flodén describes in his speech how inflation has shown a falling trend in recent years and been lower than the target level of 2 per cent. There are several reasons for concern over this, according to Mr Flodén. A surprisingly low inflation rate means that real wages will be higher than was intended when the nominal wage agreements were signed. It is also generally more difficult to adapt real wages between different sectors and individuals when inflation is low. This can make companies less inclined to recruit new staff and may contribute to higher unemployment, although the exact effects are difficult to quantify.
If inflation deviates from the target over a long period of time, there is also a risk that this will affect confidence in the inflation target and inflation expectations, which could lead to monetary policy being less effective and then more forceful measures would be required to bring inflation back to the target of two per cent.
Although Mr Flodén said that he was worried over the low inflation, he said at the same time that the current debate on deflation is sometimes rather too alarmist and that it often focuses on the wrong risks.
“I do not see a lengthy period with falling prices as a likely scenario for Sweden. Growth is relatively good, which should contribute to a rise in prices. Moreover, we have the scope to counteract falling prices by conducting a more expansionary monetary policy.”
Mr Flodén said that although Sweden is a small, open economy that is very much affected by what is happening abroad, one should not underestimate the ability of monetary policy to influence inflation. “Sometimes there is far too little confidence in the Riksbank's ability to meet the inflation target, but far too much confidence in our ability to reduce average unemployment,” concluded Mr Flodén.
Read the whole speech: The low rate of inflation – should we be worried and can we do anything about it?
