: greater attention to inflation? in norway inflation has been low and stable for a long period, until recently. inflation expectations, as we measure them, have been close to the inflation target. short - term fluctuations in inflation have had little impact on inflation expectations ahead. since winter, inflation expectations have increased, particularly one - year - ahead expectations. inflation has also attracted substantial media attention. in 2003, a theory called rational inattention was advanced by the nobel laureate christopher a. sims. [ 13 ] in periods of low and stable inflation, it may be rational not to pay much attention to inflation and it would be reasonable to assume that inflation remains relatively constant. once inflation reaches a high level, agents start paying attention to it and find it worthwhile to spend time and resources on factoring future inflation into their economic decisions. if economic agents expect high inflation to persist, the high inflation numbers may become a source of persistently high inflation. both inflation and inflation expectations become entrenched at a higher level, and it becomes more difficult to bring inflation down. chart : from one expectations regime to another this can also be illustrated in a model exercise. we again look at a cost shock. in the model exercises i showed earlier, expectations formation remained unchanged even when inflation surged. both firms and households have assumed that inflation will move down relatively quickly. the effects in the standard model are represented by the dark blue lines. in the scenario shown by the light blue lines, we introduce the possibility of a more persistent change in inflation expectations when inflation becomes high. [ 15 ] here households and firms pay more attention to the inflation numbers and assume that inflation will remain persistently high. the cost shock propagates, and inflation continues to move up. a stronger and prolonged period of monetary policy tightening is then required to bring down inflation. the real economic costs associated with high inflation increase. chart : concluding slide conclusion let me conclude. norges bank is charged with ensuring low and stable inflation. inflation has surged to a high level over a short period. our task is to bring it down again. wage - price spirals have not been a theme in norway or among our closest trading partners for a long time. one of the lessons learned from the great inflation of the 1970s and 1980s is the importance of firmly anchored inflation expectations. many countries experienced a period of high unemployment before inflation was brought under control, and inflation expectations fell. we do not believe that there is an imminent danger of a wage - price spiral

at high levels. uncertainty about the inflation outlook increases, and economic planning becomes more difficult. for example, bidding on contracts is riskier. uncertainty can also lead to a situation where investment projects with longer horizons must give way to investment projects with shorter horizons. [ 1 ] this may lead to lower investment levels and, over time, to lower potential output. there will always be some uncertainty when planning consumption and investment, but uncertainty about the value of money should not be a factor influencing agents ’ economic decisions. high inflation also makes it more difficult to determine whether an increase in the price of a good is an increase in the relative price or reflects an increase in the general price level. relative prices, or price differences between goods and services, should ideally reflect demand and production cost. correct prices contribute to the economically efficient production and distribution of goods. when it becomes difficult to observe relative prices, resource use may become less efficient. high inflation not only makes it more difficult to observe relative prices but may also impair the ability of relative prices to reflect supply and demand at a given time. the reason is that most prices are not changed continually. in a high - inflation environment, the relative price of a good gradually falls until the firm adjusts the price. right before the price change, the relative price will therefore often be “ too low ”. right after the price change, it will often be “ too high ”, because the firm will factor in expected inflation when adjusting the price. these inflation costs figure prominently in the new keynesian literature but are probably not very large in practice. a final point relates to distributional effects. high and variable inflation also leads to unexpected changes in purchasing power. wage income and social security benefits are normally not protected against changes in the general price level – at least not in the short term. an unexpected increase in inflation will therefore reduce most households ’ purchasing power. this especially affects households that cannot draw on savings. in this group we are likely to find a large share of lowincome households. chart : regulation on monetary policy so there are good reasons that low and stable inflation is a monetary policy objective. the operational target of monetary policy in norway is consumer price inflation of close to 2 percent over time. we measure consumer prices using the consumer price index ( cpi ). the cpi seeks to measure the rise in prices facing households. the index is widely used and well known. virtually all inflationtargeting countries have chosen to stabilise cpi inflation. the cpi