The Riksbank thinks inflation is a “price phenomenon”

The Riksbank´s “Monetary Policy Report” asks the question: “Why is inflation low” and this is a summary of the answer:

Inflation has been low in Sweden in recent years and fell further in the latter part of 2013, mainly because the rate of price increase for services slowed down. This article points to the existence of several different factors that have contributed to this low inflation at different points in time. Demand has been weak for many years, which has contributed to cost increases being moderate and price mark-ups low. Energy prices have also developed weakly over the past few years. A stronger exchange rate contributed to lower inflation in 2011–2012, but probably to a lesser degree since 2013. Food prices have increased more slowly since the end of last year.

The only reason that makes sense is “Demand has been weak” (the others fall under “reasoning from a price change”), but they never ask why! Maybe the Riksbank does not like to say “my fault”, as is clearly shown in the chart below.


The next charts clearly demonstrate the danger of monetary policy reacting to price (oil) shocks. It did it in mid-2008 and then again in late 2010. In the second round of tightening the “justification” was “exuberance in the real estate market”.


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