if one looks at developments in the swedish economy, our assessment in september was that it was actually stronger than in june. here the labour market and productivity deserve special attention. these are two of the most important factors, which determine how cost pressures and thereby inflation will develop. it was clear in september that the labour market had tightened further. the increase in the number of persons employed had been around as large as we were expecting in the june report. however, the number of people in the labour force had not increased at the same rate we expected then. this meant that unemployment was also lower than we had predicted. given these signs of a tighter labour market, it was fairly reasonable to believe that wages would increase more rapidly in future than they had done in previous years. but we could note that this was not yet visible in the statistics. the picture painted by the national mediation office ’ s statistics shows very moderate increases. but as i pointed out at our september meeting, it is probable that this picture will change when the new central wage agreements signed in the spring begin to make their mark in their respective sectors. and just as for developments in the labour market as a whole, this is something we follow closely. as i have just noted, it is now clear that an increasing number of people are working. it is normally the case that when many new people obtain work towards the end of an upturn phase of the economic cycle, the work is a little less efficient, that is, productivity growth declines. and this is just what we have seen during the first half of this year. the fact that this would happen is something we have foreseen for a long time, although not that it would happen as soon and as quickly as it actually has. this has also led to the forecast for productivity for the whole of 2007 being lowered as early as june. but i did not see any reason to change the forecast for productivity for coming years ; my assessment was still that productivity would recover. this was because i viewed the slowdown in productivity as temporary. but productivity is a factor that is difficult to assess – there is a risk that the slowdown will be prolonged and lead to stronger cost pressures. this was one of the risk factors we noted in the june monetary policy report. the assessment in september was that food prices would contribute to higher inflationary pressures than we had previously anticipated. if we look at how inflation has developed in recent months, the forecasts from june have been relatively accurate. in august

or even totally disregarded. a second example relates to the reliance on recent data to estimate parameters of probability distributions. statistical models, generally using data based on the recent past, tended to produce over - optimistic estimates due to the apparently very favourable operating environment that preceded the eruption of the turmoil that i just described. the generalised “ hunt - for - yield ” in global financial markets was also likely to have contributed a great deal to the distortion of the price of the unit of risk. the compression of spreads and risk premia coupled with the search for higher returns tended to lead to a higher level of investors ’ appetite for risk. this, in turn, further inflated valuations based on very favourable expectations of future returns. contributing to the underpricing of a unit of risk was also the opacity and complexity of structured financial products. not even sophisticated investors were able to assess the risks embedded in these products properly. underestimation of the quantity of risk but in my view, an even more astounding aspect was the generalised under - appreciation of the quantity of risk borne by market participants. in fact, as the turmoil unfolded, some large financial institutions revealed a massive concentration of risk, suggesting that risk management systems had failed to identify the quantity of risk that financial institutions were accumulating. a good example relates to the credit default swap ( cds ) market. this market hardly existed in 2002 and grew at an incredible pace to reach a size of $ 58 billion in notional amounts in 2007. by buying protection on a particular bond, market participants believed themselves to be largely insulated against the risk of default of the issuer. however, this protection turned out to be defective when the first signs of financial market distress emerged. in fact, during its steady growth in the pre - turmoil phase, the performance of the see, ecb financial stability review issues of 2006 and 2007, for example and the speech given by j. - c. trichet in davos in january 2007 ( see financial times, 29 january 2007 article entitled “ prepare for asset repricing, warns trichet ” excerpts : “ current conditions in global financial markets look potentially unstable, suggesting that investors need to prepare themselves for a significant repricing of some assets, jean - claude trichet, president of the european central bank, warned at the weekend in davos. the recent explosion of structured financial products and derivatives had made it more difficult for regulators and investors to judge the current risks in the financial system