speech date : 9 december 2022 speaker : deputy governor per jansson venue : swedbank monetary policy when inflation is too high – prerequisites and challenges * “ there are decades when nothing happens ; and there are weeks when decades happen. ” the words are said to be vladimir lenin's, but it is disputed whether that really is the case. nevertheless, the quotation is very well suited to what i intend to talk about today. once a year, i usually make a longer speech, which is also published on the riksbank ’ s website. the most recent was in december 2021. 1 my speech then was about the division of roles in macroeconomic policy, and my main message was that in the future fiscal policy needs to be more active than has been the case in recent decades. 2 i emphasised in my speech that the inflation target needs to be symmetrical, that is, it is as important to counteract too low inflation as it is to counteract too high inflation. but at that time, too high inflation was not regarded as a particularly pressing threat, nor was it something i specifically mentioned in the speech. the situation has changed rapidly to recall how the situation looked at the end of january this year, one can look up the inflation forecasts of swedish forecasters at that time. as energy prices had begun to rise, all forecasters believed that inflation in 2022 would be higher than the target of 2 per cent. but they all also expected that this effect would be temporary and that inflation in 2023 would again be below the target on average ( figure 1 ). 3 the forecasters judged that these developments would be compatible * i would like to thank mikael apel for his work on this speech, charlotta edler, bul ekici, jesper hansson, annleena mikiver and marianne sterner for valuable comments and elizabeth nilsson for translation. the views expressed in this speech are my own and are not necessarily shared by the other members of the executive board. 1 jansson ( 2021 ). 2 the thoughts i raised in that speech seem to have become topical. in september this year, an eso report on the division of roles between fiscal and monetary policy was published ; see calmfors, hassler and seim ( 2022 ). 3 the spread in the inflation forecasts for 2023 was relatively large, from nordea ’ s 1. 2 per cent to swedbank ’ s 1.

. nor have any serious imbalances arisen. so thus far there is reason to be positive about the economic situation ; most leading indicators point to an economic recovery, with an upturn in activity during 2002. there is, however, the problem that inflation has for a time been clearly above the riksbank ’ s 2 per cent target. to a certain extent the comparatively high inflation can be explained by various supply shocks that have raised the prices of electricity, meat, fruit and vegetables, for instance. the background to these shocks includes the previous winter ’ s low precipitation for hydroelectric power, livestock diseases and poor harvests due to last autumn ’ s unusually cold weather in europe. as i said, shocks of this type can raise the general price level and lead, as in these cases, to a transitory increase in the rate of inflation. but even if one disregards these price increases, inflation has risen. as we discussed in a number of inflation reports last year, this probably has a number of interacting explanations. one is that resource utilisation in the swedish economy has probably been somewhat higher than envisaged earlier. this in turn no doubt explains why wage increases, particularly in domestic sectors, have been higher than expected. as this has been accompanied by weak productivity growth, mainly it seems for cyclical reasons, it has led to upward pressure on prices. a general contraction of profit shares in the economy as a whole has presumably helped to modify price increases in recent years. but this has also left firms with less room to “ absorb ” further additions to costs and weak underlying productivity growth. all this naturally raises questions about potential growth resource utilisation, inflationary pressure, competition in various markets and the workings of the economy. resource utilisation higher than expected ever since inflation expectations closed onto the target some time after the mid 1990s, a very important consideration for inflation forecasts and thereby for the formation of monetary policy has been resource utilisation. this indicator concerns the relationship between actual demand and what the economy is capable of producing in the longer run without price and wage increases accelerating. let me point out first that neither the potential growth rate, resource utilisation nor the inflation propensity in a wide sense is something that can be measured directly. for some years now the riksbank has been drawing attention to questions of this type, analysing them and presenting detailed accounts in the inflation report. although we have mainly referred to various supply shocks as explanations for inflation ’