index ( cpi ) should be 2 per cent. as monetary policy acts with a time lag, it should be based on forecasts. the riksbank ’ s forecasts are based on the assumption that the repo rate – the riksbank ’ s policy rate – will develop in such a way that monetary policy can be regarded as well - balanced. in the normal case, a well - balanced monetary policy means that the inflation forecast is close to the inflation target a couple of years ahead at the same time as the forecast for inflation and the real economy ( production, employment and unemployment ) does not fluctuate excessively. it thus a question of finding an appropriate balance between stabilising inflation and stabilising the real economy and resource utilisation. the riksbank therefore conducts what is generally referred to as flexible inflation targeting. one might think that it should be enough to simply compare the outcome for inflation with the inflation target when assessing monetary policy. but it is not that simple, for two reasons. the first is that it takes time for changes in the repo rate to have an effect on inflation and the real economy. during this period of time, shocks may occur that can push the economy in a different direction than was forecast. the monetary policy adopted may have been right, but the riksbank is unlucky and unforeseen shocks lead to inflation deviating from the target. the monetary policy adopted may have been wrong, but the riksbank is lucky and unforeseen shocks nevertheless lead to inflation hitting the target. the second is that flexible inflation targeting means that the riksbank strives not only to stabilise inflation around the inflation target but also to stabilise resource utilisation around a normal level. this can sometimes entail a difficult balancing act. shocks may, for example, occur that make it difficult to quickly bring inflation to the target without creating major fluctuations in the real economy. one may then choose to let the outcome for inflation deviate from the target. this deviation is then deliberate and represents part of a compromise between stabilising inflation and stabilising resource utilisation. so, how should one assess monetary policy? two approaches can be used. the first is to assess monetary policy a couple of years after the monetary decisions concerned, so that inflation and the real economy have had time to react to the monetary policy measures, and to use all the information available at the time of the assessment, that

. the low inflation is a result of several factors if we consider the most recent years, inflation has been so low that it has undershot the riksbank ’ s inflation target of 2 per cent. in addition to the shift in economic policy and the globalisation process, other factors, of course, have played a part, including the riksbank ’ s rate cuts, which lower mortgage interest costs. the effects of sharp but temporary rises in energy prices have also contributed, e. g. in 2001 and 2003. but even when excluding these transitory effects, inflation has been very low. the consumer price index, cpi, is the inflation measure on which the riksbank ’ s target is focused. the cpi measures the price of a basket of goods and services for household consumption. by breaking down the cpi into prices of goods and services, excluding electricity, oil and mortgage interest rates, it becomes evident that falling goods prices have been the main contributor to the low price pressures ( chart 2 ). but services prices, too, are currently rising somewhat less than motivated by the generally lower productivity growth in the services sector. developments in goods prices are firstly influenced in part by price developments for the goods that we produce ourselves in sweden, and in part by the price level and the price developments in the countries from which we import. finally, movements in the exchange rate are important. the rate of increase in producer prices of domestic goods has been low in recent years. when we have investigated this in more detail we have concluded that it is a combination of low price increases for intermediate goods, subdued wage inflation and robust productivity growth in manufacturing that has caused lower domestic producer prices. as regards producer prices of imported goods, these have dropped since the end of 2002. this partly reflects the more or less continuous strengthening of the krona between 2001 and 2004, which has had an impact on the prices with a slight lag. moreover, consumer price inflation in the international market was muted during the last economic slowdown. we have also seen a rise in the share of imports from low - cost countries, which has also contributed to the low rate of price increases for consumer goods. the effect of this shift towards cheaper import countries is not fully captured, however, by the method that we so far have used to forecast import prices. this could be one reason why our forecasts have not completely managed to predict the fall in import prices. this is a problem that we are working on at the moment. the distribution