manufacturing and construction, but growth is expected to level off. the supply of skilled labour is a constraint on the growth potential. the investment rate is stable and moderate. enterprises in the region envisage a slight rise in prices in the period ahead. inflation decelerated markedly from summer 2003 and continued to fall in the beginning of 2004. consumer price inflation has subsequently picked up, albeit at a gentle pace. in august, the year - on - year rise in consumer prices adjusted for tax changes and excluding energy products ( cpiate ) was 1. 3 per cent. adjusted for the interest rate ’ s direct effect on house rents, the year - on - year rise in the cpi - ate may be estimated at 1. 5 per cent in august. the cpi rose by 1. 9 per cent in the same period. stambøl, l. s. ( 2005 ) : arbeidsmarkedsmobilitet i like og ulike regionale arbeidsmarkeder ( labour market mobility in similar and different labour markets ), økonomiske analyser 4 / 2005, statistics norway. 2 / 7 prices for domestically produced goods and services rose by 2. 1 per cent in the twelve months to august this year. higher capacity utilisation is providing the basis for higher margins in some industries. service prices, which showed little rise last year, have increased again this year. in many industries, including the airline industry, where price competition is strong, low profitability has led to an increase in prices. high oil prices have also resulted in increased prices, for example for transport services. on the basis of the pay increases agreed upon in this year ’ s wage settlement, combined with the estimates for wage drift and wage carry - over, annual wage growth is projected at around 3½ per cent this year. lower - than - projected wage growth may be related to the fact that there were few signs of improvement in labour market conditions prior to this year ’ s wage settlement. lower - than - projected consumer price inflation last year may also have contributed. low wage growth will in turn contribute to curbing the rise in prices for domestically produced goods and services. prices for imported consumer goods have continued to fall. the decline in prices may reflect high productivity growth in the production of some goods and large investments to increase production capacity, particularly in china. this has led to strong competition and a low rise in prices for internationally traded goods. the shift in imports, for

have become increasingly efficient in their use of resources, and the supply of labour has been ample. nevertheless, in the face of such strong external influences, smoothing developments in the norwegian economy is no easy task. government revenues include large net cash flows deriving from oil, which gives us an economic base that is not available to many other countries. the size of the cash flow from petroleum activities varies, however. and if petroleum revenues were to be spent as they accrue, the result would be wider fluctuations in the norwegian economy. petroleum revenue spending also has an impact on competitiveness in norwegian business and industry. extensive and uneven spending of petroleum revenues would have a negative impact on exposed industries. the particular challenges of petroleum revenues can be illustrated by looking at the basic relationship between aggregate production, consumption and relative prices. the potential production frontier shows alternative combinations for the production of sheltered goods and goods exposed to international competition when labour and capital are used efficiently. consumers prefer a combination of sheltered and traded goods. in equilibrium, the relative price of sheltered goods in terms of traded goods is the price that clears the markets. in this simple one - period model, the trade balance is zero. furthermore, the relative price is equal to the real exchange rate. introducing petroleum revenues, which can be seen as a cost - free foreign exchange gift, separates the consumption possibility frontier from potential production in mainland norway. consumers can increase their consumption of traded goods without producing more. however, with a higher income level, demand for sheltered goods also increases. in order to facilitate the transfer of resources, wages are bid up and prices for sheltered goods increase. consequently, the real exchange rate appreciates. the new equilibrium implies that consumption and production of sheltered goods have risen. production of traded goods has declined, while the consumption of these goods has increased due to the foreign exchange gift. structural changes – i. e. the transfer of resources from production of exposed to sheltered goods – are amplified when petroleum revenue spending increases substantially. and the challenges resulting from these structural changes would be amplified if petroleum revenue spending varied from one period to another. victor norman has described this mechanism and presented charts similar to the ones shown here in textbooks that have been widely used at norwegian universities and business schools since the early 1980s. this mechanism was also recognized at an early stage by the norwegian government. in 1974, in a report 1 to the parliament entitled “ the role of petroleum activities in norwegian society ”, this issue was discussed in depth. i quote : “ a