. 5 per cent. as measured by undinhx, which also excludes goods that are mainly imported, inflation amounted instead to 2. 1 per cent. however, the latter indicator disregards a large proportion of the factors that contribute to a weaker price trend for goods in the longer run. 6. conclusions about inflation 1996 - 98 a – inflation - measured with the cpi - was below the target and the lower tolerance limit during 1996 - 1998 a – cpi - inflation has been markedly affected in all three years by transitory effects that are easy to identify a – excluding more transitory price effects, inflation has been inside the stipulated tolerance interval this review shows that in all three years ( 1996a€ “ 98 ) inflation has been below the target expressed in terms of the cpi. however, excluding more transitory price effects that monetary policy neither can nor should try to counter in full, inflation has been inside the stipulated tolerance interval. i shall be returning to the reasons why price effects of this type should be disregarded in an appraisal of the riksbanka€™s monetary policy. permanent and transitory inflation a€ “ a schematic account1 let us now use some simplified examples to analyse how different transitory effects on inflation may arise and what they may imply for monetary policy. note that we are now studying the direct effects on inflation and disregarding, at least in the second and third examples, the indirect influences that act in the longer run. to illustrate the effects of the various shocks on the picture of inflation as measured with the various indexes, rules of thumb have been used in each example. in practice, a monetary policy situation may also include aspects that prompt the riksbank to take other effects of its policy measures into account. 7. permanent and transitory inflation a schematic account initial position international slowdown. with unchanged repo rate inflation 2 years ahead drops to 1 %. cpi and und1x then coincide. repo rate cut by 2 p. p. the economy picks up and und1x inflation returns to 2 %. und1x cpi however, the repo rate cut means lower house mortgage 1 expenditure ; approximate effects : - 1. 2 p. p. after one year, - 0. 4 p. p. after two years and some tenths in the following year. forecast example 1 : an economic slowdown assume that international economic activity suddenly falters. this will affect the economic situation in sweden.

is assumed to have a downward effect on cpi inflation of 0. 7 percentage points in the current year. this, however, constitutes a one - off shift in the price level, not an effect that alters inflationa€™s trend. all else equal, 12 months later the rate of inflation will shift back up to the earlier level. note, however, that inflation measured with und1x is not affected ; the rate remains stable around 2 per cent throughout the period. neither are any monetary policy measures taken in this example, as long as inflation expectations do not change. the reason is that by the time a repo rate cut would elicit effects, the tax changes would no longer be affecting the inflation rate. this is evident from the absence of any effect on underlying inflation. initially, moreover, the interest expenditure item in the cpi would move in the [UNK] direction and lower cpi inflation even more. if medium - term inflation expectations were to be influenced, on the other hand, monetary policy action might be called for. an adjustment of expectations in the light of the tax change has consequences for underlying inflation, so that inflation may be below the target somewhat further ahead. 9. permanent and transitory inflation a schematic account initial position economic development stable, underlying inflation undinhx - in line with the target. undinhx good coffee harvest and increased supply of oil. these commoditiesa€™ prices fall sharply in july year 0 and are then stable at the new, lower level. a€¢cpi - inflation is lowered for a period of twelve months and so is und1x. a€¢but underlying inflation measured with undinhx remains stable. cpi och und1x year example 3 : falling commodity prices from the earlier examples it might be supposed that und1x is an index of underlying inflation that would be preferable to the cpi as a basis for the formulation of monetary policy, so that policy ought to be appraised strictly in relation to this indicator. however, even und1x may be affected by transitory shocks. let us assume that the price of oil suddenly falls and then remains stable at the lower level. underlying inflation measured with und1x will then fall as much as the cpi. undinhx, on the other hand, remains stable around the 2 per cent target. after 12 months, however, the first two measures of inflation return to 2 per cent. this follows from the assumption of a one - off