Riksbank Deputy Governor Per Jansson highlighted risks to inflation from strengthening demand, supply constraints and a weaker krona in remarks at the National Mediation Office’s annual conference on wage formation. Although inflation’s starting position remains relatively favourable, he recalled that these upside risks had led him at the September monetary policy meeting to favour slightly faster normalisation of the policy rate than envisaged in the June forecast. Sweden’s economic recovery is now clear, with strong and broad-based growth supported partly by unusually expansionary fiscal policy. Rising leading indicators also support the growth outlook. At the same time, international conflicts have contributed to higher fuel and electricity prices. The Middle East conflict and interest rate differentials with other major economies have also weighed on the krona, which has weakened during the year. Prolonged conflicts increase the risk that higher energy prices become embedded in the broader inflation process. Temporary fiscal measures, including lower value-added tax on food and subsidised public transport, are currently reducing inflation but will push it up when they expire. Monetary policy assessments look through these temporary effects and normally also disregard volatile energy price movements. Jansson also credited balanced wage formation during the high-inflation years with helping Sweden bring inflation down faster and enabling earlier and deeper interest rate cuts. The next monetary policy decision will reassess the outlook against new information.

Original source