##ory factors partly explain the drop. falling house mortgage interest costs, occasioned in part by the riksbank ’ s own interest rate cuts, played a large part in the low inflation figures. the trend has now turned and the rate of inflation is beginning to move up. but the main reason for this is that the transient downward factors are no longer at work to the same degree ; the increase in underlying inflation is therefore more subdued. in the light of the assessments of economic activity and other factors that affect inflation ( e. g. inflation expectations ), in the inflation report the riksbank forecast that annual cpi inflation would be around 1 per cent in 1997 and around 2 per cent in both 1998 and 1999. some acceleration was envisaged in the latter two years. the assessment carried some reservations. matters discussed in the report included the risks associated with rising activity, the difficulties in knowing how the supply side would react and the - 4coming round of wage negotiations. there may be reasons for elaborating on that discussion in some respects. output gap closing by degrees in the inflation report the riksbank considers that sweden ’ s gross domestic product will grow by around 2 per cent in 1997 and around 3 per cent in 1998. in 1999 the gdp growth rate is expected to be rather more than 3 per cent. this implies that in 1998 and 1999 growth will be stronger than the increase in potential output, for which the annual trend is estimated to be just over 2 per cent. that means that today ’ s surplus capacity will be activated by degrees. it is difficult to tell how quickly this will happen. the riksbank considers that the output gap - - a way of attempting to gauge unutilised capacity in the economy as a whole - - is currently about 2 per cent of gdp. with the growth rates envisaged above, the gap would then close some time in 1999. other information with a bearing on when inflation might be likely to accelerate was also included in the inflation report. estimates of structural unemployment and thereby, indirectly, of the level of unemployment that can be combined with stable, low inflation, suggest that risks of inflation also exist less than two years ahead. the rate at which capacity utilisation rises may likewise play a part. a rapid reduction of unutilised resources might generate inflationary impulses even though there is still a capacity surplus at total level. risks in the wage negotiations wage formation is particularly relevant at present because the settlements that are due in

germany and other countries almost a week ago, many people have asked how this affects the riksbank ’ s actions. as stated already on several occasions, the answer is : not much as long as the conditions for inflation have not changed. the riksbank targets inflation and it is this target that guides policy. in view of what has happened in the past month, there is reason, finally, to highlight a couple of points in the report. the first is that monetary policy is being conducted against the background of an economic upswing. a gradual increase in capacity utilisation is therefore probable. sweden does not differ from germany in that particular respect. the other point is the diminished risk of a development that is appreciably weaker than in the main scenario ; this assessment is supported by the latest statistics. in the light of the rising activity, the main difficulty in assessing future inflation currently lies in an uncertainty about developments on the supply side, wage formation in particular. it is difficult to foresee how the swedish economy will react to a broad economic upswing. it is therefore important, not least on that account, to analyse incoming information.