shocks to inflation and that arise and diminish over the next year. however, sometimes temporary effects on inflation arise that do not subside during the subsequent year. these effects then show up in the inflation forecast, measured in terms of the cpi, one to two years ahead. but if the effects are expected to disappear quite soon afterwards, there may be cause not to counter them through repo rate adjustments. in other words there may be reason in certain situations to depart from the rule that the repo rate should be changed if the forecast of cpi inflation differs from the 2 per cent target one to two years ahead. in such situations it is very important that we communicate our intention to deviate from the established policy rule and that we explain clearly the underlying reasons. one way in which the riksbank has decided to deal with the issue is to highlight at various times " adjusted " measures of inflation, as indicators of the longer - term inflationary trend. i shall now illustrate this with a few examples. the first example is from the period during the second half of the 1990s when monetary policy was eased and there was a steep decline in the general level of interest rates. between autumn 1995 and spring 1999 the repo rate was cut from just under 9 per cent to less than 3 per cent. this was accompanied by a sharp decline in long - term interest rates. the aim of the repo rate cuts was to stimulate the economy via the traditional demand channels so as to contribute to a rise in cpi inflation, but these effects came first after a certain lag. the immediate effects on the cpi of the rate cuts and the fall in the general level of interest rates were the opposite, through declining mortgage interest costs. this meant that cpi inflation initially dropped very sharply. due to the fact that the change in the general interest rate situation was both large and protracted, the cpi was affected for an appreciably longer time than one to two years. as the low cpi inflation was largely a result of the riksbank's rate cuts and therefore was judged to be transitory, the bank did not see reason to counter it through a further easing of monetary policy. during this period, however, the riksbank was often asked why the repo rate was not lowered in spite of below - target inflation, which indicated the need for a more explicit explanation of policy. to this end we highlighted a new index as an important inflation measure, namely und1x, which, among other

affected by new and unexpected shocks. the inflation outcome a couple of years ahead will therefore have been affected by events that could not be predicted when the monetary policy decisions were made. a direct comparison of outcomes and targets for inflation may therefore lead to the wrong conclusions. the inflation outcome may be in line with the target even if the monetary policy decisions were incorrect because the central bank was lucky and unexpected shocks nevertheless resulted in the right inflation outcome. alternatively, the inflation outcome may deviate from the target even if the monetary policy decisions were correct because the central bank was unlucky and unexpected disruptions resulted in the wrong inflation outcome. inflation targeting is flexible a second circumstance that means that a simple comparison of outcomes and targets for inflation is inadequate is that the riksbank and all the other central banks that have inflation targets conduct flexible inflation targeting rather than strict inflation targeting. under a flexible inflation targeting regime, the central bank strives not only to stabilise inflation around the inflation target but also to stabilise the real economy. under a strict inflation targeting regime, the central bank strives only to stabilise inflation without concerning itself about the consequences for the real economy. in many situations, a conflict of objectives may arise between stabilising inflation and stabilising the real economy. let us assume that a shock, such as a sharp rise in the oil price, has driven up inflation at the same time as production has slackened significantly. if, in such a case, the aim of monetary policy is to quickly bring inflation back to the target, a significant interest rate increase may be required which will dampen production even further. by quickly stabilising inflation – which would be the case with strict inflation targeting – the central bank would destabilise the real economy. by not aiming to bring inflation back to the target as quickly as possible, the central bank would help to stabilise the real economy. how long it should take to return inflation to the target depends, among other things, on the type, magnitude and duration of the shock that has occurred and the importance that the central bank attaches to real economic stability. a difference between the outcome and the target for inflation may thus be deliberate. it may be part of an appropriate compromise between stabilising inflation and stabilising the real economy. it is, therefore, simply not good enough to just compare outcomes and targets for inflation in an evaluation of monetary policy. what does flexible inflation targeting entail? before i begin to