equally important to avoid an inflation rate that is too low, as it is to avoid an inflation rate that is too high. the interest rate is the most important monetary policy instrument. it affects price inflation through two channels : demand for domestic goods and services and the krone exchange rate. changes in labour costs influence the rise in prices for domestically produced goods and services. the tighter the labour market is, the higher wage growth will be. demand for goods and services determines to a great extent how tight the labour market will be. high levels of private and public consumption, investment and exports will sustain the demand for labour. when the supply of labour is limited, the competition for labour pushes up wages. a tight monetary policy stance with a high real interest rate will curb domestic demand. in many countries, low and stable consumer price inflation is the goal of monetary policy. consequently, we can assume that imported price inflation will remain subdued. however, price inflation will nonetheless vary in pace with global economic developments. the krone exchange rate also plays an important role in determining import prices. a strong krone exchange rate will curb prices for imported goods, while a weak krone exchange rate will result in higher prices. when there is a rise in the interest rate in norway and a widening differential between domestic and foreign interest rates, investments in nok will increase, and the krone exchange rate will rise. price inflation may vary considerably from month to month. this variation may be due to random or temporary conditions, such as fluctuations in electricity prices or petrol prices, or the effects of changes in real taxes. when we assess the interest rate, we disregard these effects. statistics norway has constructed an indicator for adjusted price inflation - cpi - ate - which is the measure we use to examine the results of monetary policy performance. a sharp rise in labour costs is currently fuelling brisk growth in the prices of goods and services produced in norway. inflation is being kept at bay because the rise in prices for imported goods is close to zero. a stronger krone exchange rate, increased trade with china and eastern european countries, a reduction in tariffs and the global downturn have kept import prices low. if the krone exchange rate remains at today ’ s level, imported price inflation will remain subdued. wage growth has remained at between five and seven per cent every year since 1998. it appears that this year ’ s wage settlement will result in a similar outcome. strong wage growth is the result of a tight labour market. the interest rate

annual real rate of return of 1½ - 2 per cent. by way of comparison, the authorities have based their use of petroleum revenues over the central government budget on the assumption that the petroleum fund can generate a long - term real return of 4 per cent. it is unlikely that this rate of return will be achieved if we only invest in bonds. buying a bond means lending money to others. buying equities is the same as investing in real assets. buying equities gives us direct ownership of the means of production in global business and industry. on the one hand, these ownership rights provide high returns when companies are flourishing. on the other, shareholders are the first to sustain losses when companies fail. consequently, the return on shares fluctuates far more than the return on bonds, reflecting the higher level of risk. over the past 75 years, equity returns in the us market have been negative almost every third year. an investor will only invest in high - risk vehicles if it is reasonable to expect compensation for the risk. the compensation for high risk in the stock market is a far higher average return for equities compared with bonds. since 1926, the annual return on us equities has on average been 4. 8 percentage points higher than the return on bonds. also in most ten - year periods, investing in us equities has been profitable, with the exception of the depression in the 1930s and the last half of the 1970s. equity returns have been negative after ten years only in the years between 1928 and 1938, in other words on equity investments made the year before the 1929 stock market crash. it may also be worth noting that equities purchased during recessions - such as in the mid - 1930s and mid - 1970s - brought solid returns ten years later. the picture is the same for most other countries. since short - term fluctuations in equity prices are difficult to predict, it may be a sound strategy to keep the share of equities constant over time. this means buying a relatively large volume of equities when prices are low, and buying a smaller volume - or selling - when prices are high. this is the strategy applied by the petroleum fund. let us now revert to the norwegian economy and norwegian economic policy. the revision of economic policy in march 2001 can to some extent be said to be a consequence of our oil economy. the new guidelines have also changed the interaction between the different components of economic policy. fiscal policy will now have an