##ens prices. but there are also factors that could hold back supply and mean that it does not increase as much as would be necessary to meet the increased world demand. some supply shocks are of a temporary nature, such as the drought in australia last year and poor harvests in some regions. one cannot rule out the possibility that climate effects have played a role, and in this case such shocks may be a recurring problem. 6 another factor that has had a restraining effect on supply and has thereby contributed to boosting the increase in world food prices is the export restrictions introduced by some countries that are major producers of food, in an attempt to protect their domestic consumption from the price increases. the effect on the price of wheat when export restrictions were reduced in the ukraine is, as i mentioned earlier, a good example of how this can have tangible effect on prices. another factor that has certainly been significant is the depreciation of the dollar. commodities are priced in dollars, and this may mean that commodities exporters will try to gain compensation through higher prices if the dollar falls. in recent years, portfolio investment in commodities has become an increasingly common means of diversifying and spreading risks. the fact that interest has increased is due to the return on other investments deteriorating and this has probably contributed to reinforcing the upswing in commodity prices. if the expectations of the relative return on this type of investment were to decline, it could instead have a subduing effect on prices. how does one weigh together all of the factors i have mentioned? there is of course considerable uncertainty. the assessment we made at our last monetary policy meeting was that the world market prices would not continue to rise at the same rapid rate. this meant that the high inflationary impulses from the price rise on food commodities were assessed as see irma rosenberg, “ rising commodity prices ”, speech held on 9 may 2008. imf ( 2008 ) world economic outlook. see the un ’ s climate panel 2007 : impacts, adaptation and vulnerability. partly temporary. this is something that is so far supported by the tendencies towards a slowdown in food commodities prices in the world market which we have been able to see recently. information received since the last meeting i now intend to move on to say a few words about the information received since the most recent interest rate decision. there are now signs that may indicate that the turbulence in the financial markets has declined somewhat. the federal reserve ’ s actions to save the us investment bank bear stearns appear

that world market prices are rising rapidly have for monetary policy? one must realise that these are examples of changes in relative prices. that is, the prices of commodities such as food and energy are rising in relation to the prices of, for instance, manufactured goods. for monetary policy it is important to note that the changes in relative prices are not in themselves inflation. inflation refers to a rise in the general price level, or the average of all prices. central banks cannot and should not counteract changes in relative prices. but what central banks can influence with monetary policy is the way inflation develops in the long term. some changes in relative prices can occur when inflation is low if the price increases on the goods that have become relatively more expensive is compensated by a weaker growth in prices of other goods. the same relative price change can be achieved when inflation is high, if the prices of all goods rise, but at different paces. if food commodities and oil prices soar, this means that companies'costs will rise and inflation will be pushed up. it is not possible to immediately counteract such strong inflationary impulses with monetary policy, as monetary policy works with a time lag. but what a central bank with an inflation target then faces is the task of ensuring that the rising food and energy prices do not result in permanently higher inflation expectations and second round effects in the form of demands for higher wages and prices of other goods. regardless of what happens to the relative prices, our task is – and this is important – to ensure that inflation is on average 2 per cent a couple of years ahead. … and we are only concerned with the lasting effects how should monetary policy respond to the rapid increases in food prices? this depends on whether the effects on inflation are assessed as temporary or lasting. monetary policy cannot respond to temporary upswings in inflation that can be expected to subside quickly, as monetary policy acts with a time lag. raising the interest rate to counteract temporary inflationary impulses could cause unnecessary costs. and here i mean costs in the form of production and employment falling too much. however, monetary policy should react to price impulses that would otherwise risk having lasting effects on inflation. as i have mentioned earlier, monetary policy both in sweden and abroad is facing a severe challenge. on the one hand, the fact that oil and food prices have recently shown a rapid upturn, both in the world market and in sweden, means that inflationary pressures have increased substantially. this implies that