that is now close to zero. growth in demand and output is expected to remain high in the near term. unemployment may fall somewhat more quickly than has been the case over the past year. the output gap is expected to be positive in 2005. higher demand for companies ’ goods provides scope for increasing prices. experience shows that inflation is directly influenced by the level of capacity utilisation in the norwegian economy. some of the rise in prices for domestically produced goods and services can be attributed to higher margins in the business sector. the effects of the interest rate decline on demand, output and employment have been pronounced. it has taken time for inflation to pick up. this partly reflects low external interest rates and high oil prices, which have moderated the impact on the krone exchange rate. higher imports from low - cost countries, competition and improved efficiency in norwegian production have also kept inflation at a low level. initially, it was the fall in prices for imported consumer goods that pushed down underlying inflation. after a period, the rise in prices for domestically produced goods and services also decelerated. this was due in particular to increased competition in some goods and service markets. at the same time, wage growth slowed as a result of lower capacity utilisation in the economy. a slower rise in house rents also contributed. inflation measured by the cpi - ate reached its lowest level in the first months of 2004. inflation remained at less than ½ per cent until after the summer before picking up in autumn. inflation moved up primarily as a result of a slower decline in prices for imported consumer goods, but the depreciation of the krone since the beginning of 2003 has also contributed. in addition, the rise in prices for domestically produced goods and services stabilised, and towards the end of 2004 there was a tendency towards a higher rise in prices for these goods and services. at the beginning of 2005, inflation measured by the cpi - ate was lower than expected. prices for imported consumer goods fell more than expected. it is uncertain whether this price decline was due to abnormal seasonal patterns or a fall in underlying inflation. the fall in prices may be related to an unusually warm winter, which has made it more difficult to sell winter clothing and sports equipment at ordinary prices. on the other hand, there are indications that prices for imported consumer goods in foreign currency may have fallen somewhat more than previously assumed. the wide variations in prices for some imported consumer goods, especially clothing and footwear, may entail wide monthly variations in

no indication that growth in imports from low - cost countries is declining. for example, china ’ s share of footwear imports to norway increased by 4 percentage points to 20 per cent in 2004. the share of clothing imports increased by 2 percentage points to 32 per cent. the decline in prices for clothing and footwear will probably continue in the coming years. prices for audiovisual equipment are still falling as a result of strong international competition and high productivity growth. we assume that the effects of structural changes in these markets will gradually be exhausted towards the end of the projection period. external price impulses via consumer goods are expected to increase in pace with unit labour costs among our trading partners. the projections in inflation report 1 / 05, published on 16 march, are based on a gradual increase in the interest rate. this is in line with financial and foreign exchange market expectations. the krone exchange rate is assumed to move in line with the forward exchange rate. this implies that the krone will remain fairly stable around the current level in the years ahead. growth in private consumption is expected to remain buoyant both this year and next, primarily reflecting low real interest rates, strong growth in real disposable income and a continued rise in house prices. in the period ahead, higher employment and wage growth will continue to fuel household demand. on the other hand, household debt has risen sharply. this implies that a normalisation of interest rates will increase household net interest expenses. after a period, growth in consumption may be fairly low. however, we assume that households will spread consumption over time so that the savings ratio will continue to fall in spite of an increase in interest rates. growth in housing investment is expected to ease through 2005. however, the projection for housing starts is also very high for 2005. such a high level of housing starts over several years probably means that more dwellings will be constructed than implied by underlying demand. as a result, housing investment is expected to decline after a period. higher interest rates and weaker developments in the norwegian economy may also lead to a fall in residential construction after a period. the upturn in mainland fixed investment is broadly based. stronger profitability, higher capacity utilisation and solid export growth will contribute to continued investment growth in goods - producing industries. demand for services is expected to continue to grow for a period ahead with an attendant increase in investment in service sectors. when growth in the economy gradually slows down, investment growth will probably slacken. mainland exports