curbing the pass through from cost - push factors. as a matter of fact, the prices of products that do not use food or energy as main inputs have been rather well behaved compared to the prices of products that have food or energy as inputs. however, the fact that first round effects of the supply side shocks have reached unprecedented levels has been affecting inflation expectations adversely. monetary policy cannot remain indifferent in case of a deterioration in the overall pricing behavior. if supply side shocks last long, their effects will spill over to the other sectors in the economy. a tighter stance is a must in order to control the expectations and to prevent the mutation of supply side shocks into demand shocks. if monetary policy does not react to the disruption in inflation dynamics, supply side price hikes may, after a certain point, easily evolve into a selffeeding vicious circle. dear guests, why did the central bank not repeat the strong monetary tightening policy that it had implemented in 2006, but instead opted for a measured and gradual increase in interest rates in 2008? the current conditions differ from the may 2006 fluctuation. prominent reasons for the disruption in inflation dynamics in may 2006 were the significant depreciation of the turkish lira due to the deterioration of risk perceptions in an environment where domestic demand was strong and the impact of the exchange rate pass - through on prices as well as increases in non - processed food prices were high. the central bank ’ s response was a rapid and strong monetary tightening aimed to overcome the deterioration in inflation expectations in that period – so that economic units would continue to take the inflation target as a reference in their decisions. today, the primary cause of the lasting deterioration in inflation outlook is the presence of significant supply side shocks. as i have mentioned previously, the central bank ’ s projections suggest that it will not be possible to bring inflation back to 4 percent in the shortterm even with a sustained maintenance of the tight monetary policy stance. in this case, a strong reaction by monetary policy, as was the case in 2006, would not ensure the convergence of inflation to 4 - percent target in the short - term, but would create undesired fluctuations in economic activity and relative prices. it should be kept in mind, however, that the inflation expectations will deteriorate further in the absence of a reaction by the central bank. the current path of core inflation indicators demonstrates that the sharp increases in food and energy prices have started to adversely effect pricing behavior. the core inflation indicator that exclude

our economy will be liable to lag behind. i should like to consider two factors that i believe will be significant for sweden ’ s growth path after the turn of the millennium, namely wage formation and a functional financial system. of course there are other factors of importance for the future growth path, such as the construction of taxes and how the education system performs. they obviously have to be discussed as well. i have chosen to consider wage formation because wages make up approximately 70 % of total costs in the economy, which makes them a major determinant of the profit level ; profits in turn are important for the development of investment. the functioning of the financial system has a bearing on the possibility of financing new investment at a reasonable cost. as i see it, expected corporate profits and access to reasonable investment financing are vital for a process of transformation. wage formation let us now take a look at a period when wage formation was one factor behind a less successful transformation of the swedish economy. when the industrialised economies began to recover after world war two and international competition increased, partly because trade barriers were dismantled, it became increasingly necessary for swedish firms to adjust their product range. the requirements resembled those that now seem to lie in the not too distant future. for much of that period the level of swedish wage costs rose rapidly. this meant that corporate profitability was under pressure both from the increased international competition and for rising wage costs. to cope with this pressure, firms tried to cut production costs by means of rationalisation rather than by investing in new products. with diminishing profits, they lacked the new investment stimulus and the rapid renewal of the capital stock that the pressure for change called for. during a period of transformation, rationalisation is not enough ; new developments are equally important. at first, most things still went well. the 1960s was a fantastic decade for growth. in time, however, the strategy proved to be defensive and stagnation set in in the 1970s. there are limits to growth through rationalisation. without renewal, growth normally slows sooner or later. compared with other countries, the trend rate of growth in sweden did indeed turn downwards. in an attempt to maintain growth in the traditional industries, economic policy responded with a series of devaluations. each devaluation was invariably said to be the final one but the cycle of rising wage costs and a devaluation was still repeated again and again. the aim of compensating for the lack of change in sweden ’