Causes of Inflation in Sweden

• Increased demand for cheaper Swedish products from abroad can cause the economic curve to move upward following a recession
• A stable currency value is crucial for businesses and trading partners to understand the currency's worth over time
• Sweden aims for an annual inflation rate of 2% as stated in The Swedish Central Bank Act.
• Inflation decreases the value of money, leading to higher prices for the same goods

Causes of Inflation

• Demand-pull inflation occurs when demand exceeds supply, typically during economic booms
• Consumers are willing to pay higher prices
• Cost-push inflation happens when production costs increase, forcing producers to raise prices
• This occurs on the supply side
• Wage increases without corresponding production increases lead companies to raise prices, causing the "wage-price spiral"
• Imported inflation results from price hikes on foreign goods
• "Oil content" in goods and services contributes
• Inflation via printing press occurs when a country prints money to cover budget deficits, leading to inflation

Harmful Effects of Inflation

• If Sweden has higher inflation than other countries, exports decrease.
• Higher relative cost of goods and services, decrease in GDP and increase in unemployment
• Inflation has winners and losers
• Savers are disadvantaged as the value of savings decreases while borrowers benefit through devalued debt
• High inflation disadvantages those who save money.
• High-income individuals benefit because they have larger loans.

Deflation

• Deflation occurs when the general price level falls
• People delay consumption expecting further price drops, leading to economic stagnation and unemployment
• Companies hesitate to invest due to uncertainty in recovering money

Low Unemployment

• Fighting unemployment is a key economic policy goal due to negative impacts on individuals and society
• Economists categorize unemployment into different types
• Cyclical, structural, seasonal, and frictional

Types of Unemployment

• Cyclical unemployment occurs during economic downturns due to decreased demand
• Structural unemployment arises from technological advancements or cheaper production elsewhere
• Seasonal unemployment affects occupations that cannot be performed year-round due to climate or other reasons
• Frictional unemployment refers to the time it takes for a job seeker to find employment

Fiscal Policy

• Fiscal policy involves government use of its budget to stabilize the economy via adjustments in spending and revenue
• It involves expansive measures during recessions, such as tax cuts and increased public spending
• Restrictive measures should occur during economic booms, such as cutting public spending and raising taxes
• Public finances should be sustainable to avoid debt traps

Fiscal Policy Framework

• An expenditure ceiling is set by parliament to control state expenses.
• The state should run a surplus over the economic cycle by balancing deficits during crises with surpluses in stable times.
• Municipalities and regions must maintain balanced budgets

Labor Market Policy

• Labor market policy aims to achieve full employment
• It uses measures like unemployment benefits, education, work experience, relocation grants, and start-up assistance
• The Public Employment Service helps match the unemployed with available jobs
• Providing education and skills to fulfill job requirements
• Transitionary support via unemployment benefits
• Should create incentives for the unemployed to actively seek new employment.

Monetary Policy

• Monetary policy involves the Swedish Central Bank protecting the value of money and dampening economic fluctuations
• The Swedish parliament appoints the Central Bank's board
• Members cannot be influenced or accept instructions when setting monetary policy
• The goal of Central Bank's monetary policy is to keep inflation around 2%

Monetary Policy In Practice

• Influencing short-term interest rates, this affects borrowing costs and savings profitability.
• Measured by the Consumer Price Index excluding housing (CPIF). CPIF is used to exclude the effects of changes in housing loan interest rates when calculating the consumer price index.
• Monetary policy involves lending money to commercial banks and receiving excess funds via setting the repo rate
• Raising the repo rate increases borrowing costs for commercial banks, reducing credit volume and increasing interest rates on loans
• Conversely, lowering the repo rate reduces borrowing costs, encouraging loans and increasing investment
• The Central Bank buys or sells securities as market operations
• Buying securities increases the money supply and inflationary pressure
• Selling securities reduces the money supply.
• In spring 2023, the Central Bank increased interest rates to manage inflation due to high fuel prices caused by the war in Ukraine

Goal Conflicts in Economic Policy

• Balancing broad goals such as reducing unemployment, controlling inflation, or maintaining economic growth
• Example includes unemployment vs. inflation Historically, Sweden prioritized reducing unemployment, even at the cost of rising inflation.
• After the new Central Bank Law in the 1990s, the Central Bank now focuses on keeping inflation low and stable
• Unemployment is addressed through other economic policies
• Another example is unemployment vs. budget deficit
• Temporarily increasing state expenditures to lower unemployment can result in a higher budget deficit.

Economic Inequality

• Debate over whether the government should intervene to address economic inequality or let market forces drive income distribution

Regional Balance vs. National Growth

• Should the government prioritize regional balance within the country or boosting national GDP?

Growth vs. Environmental Concerns

• Conflict arises between the goal of economic growth and the need to protect the environment
• Requiring balancing economic goals with ecological preservation