rule, and in norway we have avoided prolonged periods of high unemployment. the reform of the economic policy framework deserves a large part of the credit, but we have also benefited from global developments. globalisation, especially china ’ s expanded role in world trade in the early 2000s, ushered in a period of low prices for globally traded goods. in many countries, the concern was that inflation was too low, not too high. and some were perhaps misled into believing that inflation was a thing of the past. the return of inflation but it turns out that inflation was not dead ( chart 5 ). two events reawaken inflation. chart 5 the return of inflation consumer prices. four - quarter change. percent inflation inflation target sources : statistics norway and norges bank 6. see richard clarida og daniel waldman ( 2008 ). “ is bad news about inflation good news for the exchange rate? and, if so, can that tell us anything about the conduct of monetary policy? ” in : john campbell ( ed. ) asset prices and monetary policy. national bureau of economic research books, university of chicago press. 7. the mechanism can be described based on the aukrust model. a weaker krone increases the wage capacity of the manufacturing sector, which sets the wage norm. increased wage capacity can lead to higher negotiated wage increases. since wage growth in manufacturing sets the standard for wage growth in the rest of the economy, wage growth in sheltered sectors will also increase. these sectors can more readily pass on higher costs to prices, driving up overall inflation. higher inflation can, in turn, lead to a further krone depreciation, if the foreign exchange market does not have confidence in monetary policy. norges bank economic perspectives 2023 first, the world is hit by a pandemic. we know the story : much of the economy is locked down, large - scale government support is provided, and central banks pursue a highly expansionary monetary policy. in may 2020, norges bank reduces its policy rate to zero. global supply chain disruptions lead to a rise in prices for a broad range of goods. when the pandemic restrictions are lifted, economic activity quickly rebounds in both norway and other countries. the unusually high level of saving during the pandemic gives an additional impetus to demand. and two years after the onset of the pandemic, the norwegian economy is operating above potential. on 24 february 2022, russia invades ukraine. energy and commodity prices so

##ar. sharp price increases for important goods hit an economy already in high gear – reminiscent of developments in 1973. higher energy prices and input costs have pushed up business costs, which in turn have spilled over into consumer prices. the surge in inflation also reflects strong demand and little spare capacity in the norwegian economy. unemployment is very low, and many norwegian firms have reported labour shortages. wage growth has accelerated and in 2022 was at its highest since 2008. strong demand may have made it easier for firms to pass on higher costs to their own selling prices. a sharp rise in prices can also be self - reinforcing. when we analyse inflation in norway, we find that a rise in the prices of some goods more readily leads to a rise in prices of other goods when inflation is high than when inflation is low. 8 some of the firms in our regional network point out that customers more readily accept a price increase when many other prices rise. when it is widely expected that prices will continue rising rapidly, that may also have a self - reinforcing effect on inflation. the chart shows inflation expectations one, two and five years ahead in norway among households, firms, specialists in economics and the social partners ( chart 6 ). 9 over the past year, inflation expectations over the next few years have shown a clear increase. longer - term expectations have increased less. 8. studies that compare price dynamics in periods of low inflation with periods of high inflation are consistent with such an interpretation. see fredrik wulfsberg ( 2016 ). " inflation and price adjustments : micro evidence from norwegian consumer prices 1975 – 2004. " american economic journal : macroeconomics, 8 ( 3 ). see also the box “ uncertainty about price dynamics when inflation is high ” in monetary policy report 4 / 2022. 9. inflation expectations one and two years ahead are an average of expectations among households, firms, specialists in economics and the social partners. only specialists in economics and the social partners are asked about inflation expectations five years ahead. norges bank economic perspectives 2023 chart 6 inflation expectations have increased inflation expectations ahead. percent 5. 5 one year ahead two years ahead five years ahead 4. 5 3. 5 2. 5 1. 5 sources : epinion, ipsos, opinion and statistics norway the expectation that inflation will be high one year ahead is not necessarily a warning signal. but we must be vigilant towards any significant increase in longer - term inflation expectations. if high inflation gains a foothold