What is inflation?
Inflation means that prices rise so that you can buy fewer goods and services for the same amount of money. The opposite of inflation is called deflation and means that prices fall instead. If such a situation persists, it can have major negative consequences for the economy.
Inflation is measured by calculating how much consumer prices have increased over a 12-month period. If inflation is 2 percent, it means that consumer prices are 2 percent higher than they were 12 months ago.
Surveys on consumer prices are carried out by Statistics Sweden, which publishes new figures every month on how prices develop. The development is summarized in the Consumer Price Index, CPI. In practical terms, they do not examine the prices of all the goods and services that we consume, but they make a selection of so-called representative goods. The goods are then weighted to reflect how much of our consumption they make up. You can think of it as a price for a basket of goods that Swedes usually consume.
The rate of inflation measured as the 12-month change in the CPI has previously been the most widely used measure of inflation. In 2017, the Riksbank, which has the task of controlling inflation, switched to using inflation according to CPIF as the target variable for monetary policy. The difference between the measures is that KPIF removes the effects of changed mortgage rates, which may be better when evaluating the effects of monetary policy. The reason for this is that housing interest rates tend to follow the repo rate and therefore there is a short-term effect on inflation in case of interest rate changes that you often want to ignore. Not least because this effect goes in the “wrong” direction. If, for example, the Riksbank lowers the interest rate in order to raise the inflation rate, CPI inflation may initially fall due to housing interest rates being lower. For that reason, from a monetary policy perspective, it becomes clearer to use KPIF. The Riksbank’s goal is that inflation according to CPIF should amount to 2 percent.
Historical inflation
If you study the development over time, it is clear that inflation has followed a significantly calmer path since the mid-1990s than was the case previously. On the one hand, inflation varies less, and on the other hand it has been significantly lower. The fact that stability has increased is largely due to the introduction of a target for inflation, but other factors have also contributed. For example, the Riksbank has also become more independent vis-à-vis the Riksdag and the government, which has given increased credibility to the inflation target. Another contributing factor is that wage formation has worked significantly better than in the 1970s and 80s. Not least thanks to the Industrial Agreement (1997), which has meant that it is the internationally competitive manufacturing industry that specifies how much wage costs may increase in other industries as well. By setting the “mark” in this way, the industry has been able to avoid inflationary wage increases.
Looking at recent years, inflationary pressure has been low and the Riksbank has therefore pursued a very expansive monetary policy in order for inflation to remain stable at 2 percent. This has put pressure on the krona, which weakened significantly in the years leading up to the corona crisis. During the corona crisis in 2020, inflation fell sharply and was close to zero. However, since the beginning of 2021, it has risen and is now significantly above the target.