cost measures increased at a decelerating rate starting in early 2002 until late 2005. recently, however, a pick - up in the rate of change of some labour cost measures has been observed. what is the overall net effect of globalisation on the dynamics of euro area inflation? attempts to quantify the extent to which the globalisation process has helped contain inflation in the euro area over recent years are subject to substantial uncertainty, for the fundamental reason that it has been difficult to identify all the effects of globalisation on inflation dynamics and disentangle them from the influences of other factors, for example those that have contributed to wage moderation and productivity growth in recent years. more specifically, moderate wage developments in the euro area partly reflect such factors as the threat of relocation of production owing to global competitive pressures or “ social pacts ” that take into account competitiveness objectives. they also reflect, however, the favourable effects on inflation expectations resulting from a credible monetary policy, the reduced bargaining power of labour unions due to changes in workers ’ preferences and a larger share of part - time and short - term labour contracts, and the refocusing of bargaining on non - wage elements, such as working hours and benefits. similarly, it has not been easy to isolate the impact of globalisation on competition and productivity growth and separate it from the effects of other factors. one conclusion that has some empirical support is that domestic inflation is no longer determined predominantly by domestic demand and supply constraints, but seems to depend more on the degree of global economic slack. this can be illustrated if we examine the relationship between domestic inflation and capacity utilisation in the g10 economies, which was rather close until the mid - 1990s, but has essentially broken down over the past decade. 1 [ see chart 8 ] against the background of all these uncertainties, it is even more difficult to predict the impact of globalisation on inflation in the future. the favourable influence of globalisation on inflation can be expected to continue in the future as a result of its direct effects on the prices of imported manufactured goods from low - cost countries and, more importantly, as a consequence of its indirect effects on wages and productivity, reflecting the increased competition in labour and product markets. at the same time, this disinflationary impact of globalisation may be partly offset – or more than offset – by global inflationary pressures in energy and commodity markets. the available evidence for the euro area as a whole suggests that the overall effect of globalisation on

##ary path we experienced in the 1970s and ’ 80s and which contributed to the recession in the early ’ 90s, which was the worst for over sixty years. a new direction in economic policy the 1970s and ’ 80s illustrate how a period of inflation creates an atmosphere of uncertainty and instability, with a speculative climate and “ short - termism ” in economic decisions. slowly but surely, production ’ s long - term conditions deteriorate. it was partly in the light of such experiences that swedish economic policy was realigned at the turn of the 1980s. since then, the focus on price stability has gained broad support in our society, including the political parties. however, in view of the severe economic problems in the early 1990s, with inflation expectations based on our historical record and a massive budget deficit, it took time for the new direction of economic policy to acquire credibility. this has been evident, for instance, in the periods of interest and exchange rate unrest. financial market trends particularly in the longer run can be regarded as an indicator of the prevailing degree of confidence in the determination and ability to conduct an economic policy that is consistent and oriented towards stability. with the free movement of capital and the globalisation of financial markets, economic policy decision - makers need to be highly disciplined. in the light of our experience since the policy realignment at the turn of the ’ 80s, this is a fact that is widely recognised today in sweden. turning the clock back would not be feasible. experience from other countries, where the policy realignment had already been made in the early 1980s, indicates that the creation of confidence in a low inflation regime takes time and a lot of hard work. but it also shows that after a while, such a process does yield its reward in the form of low interest rates, a stable currency and ultimately a favourable economic development. the price stability target following the move to a flexible exchange rate, monetary policy in sweden is directed at a quantified inflation target. in this it resembles the situation for monetary policy in australia, canada, new zealand and the united kingdom, where inflation targets are also used. in sweden the target is formulated as being to limit the increase in the consumer price index to 2 per cent. this target is to be assessed, not in terms of isolated twelve - month change figures but in a somewhat longer, annual, perspective. as monetary policy obviously cannot control price developments exactly, the target is accompanied by a tolerance interval of ±1 percentage point. this tolerance interval also serves