Inflation in Sweden

Price increases rates in Sweden are calculated by variation of the consumer price index. .Sweden’s inflation rates in the 1960-2009 periods were relatively high, as compared with prior periods. The country experienced some of the highest inflation rates in the 1970s, along with other countries. This was partially due to the global oil crisis in the same period which made the prices of commodities, and the costs of production high.

Inflation rates declined initially in the first five years of the 1980s, but skyrocketed again in the late 1980s. This is explained by expansive economic policy initiated by the Swedish government that was meant to make the country more competitive in the global economy. The expansionary policy was largely financed by currency devaluations and large budget deficit levels that heavily indebted the country. The country was also experiencing increases in wage levels and also increases in official welfare payments.

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The increases in wage and social benefits led to increases in money supply in the economy, and combined with the country’s budgetary deficits, led to inflationary pressures. Lending in the economy had also increased in the same period, further creating inflationary pressures. As a result, inflation rates jumped to 10.5 per cent from 6.4 per cent in a period of one year, from 1989 to 1990. (World Bank)

At the beginning of the 1990s, inflation rates begun to decline whereby Inflation rates fell sharply from 9.3 per cent in 1991 to 2.3 per cent in the following year.

The country started to reel the effects of an economic crisis due to the to the huge budget deficits. Sweden slid into a recession in the early 1990s in what is often termed as the crisis of the 1990s, whereby the GDP declined by 5 per cent in the period between 1990 and 1993. Employment levels fell, and the real estate bubble created in the 1980s burst, causing the country’s assets to decline. The recession of the early 1990s was largely responsible for the drop in inflation rates.

At the time, Sweden was implementing a fixed exchange rate regime and the government had to switch to a floating exchange rate in order to help curb the economic crisis. The government also changed from its expansionary economic policy to a monitory policy that would focus more on stabilizing prices.

Sweden’s central bank was responsible for ensuring that inflation rates stabilized at around 1.99 per cent. As a result of all the policies, inflation rates remained generally low in the following years, reaching a high of 3.5% in 2008 as a result of the global economic recession. The country’s inflation rates have been lower than those of the Euro zone and the United States.

From the charts below, it can be observed that growth in Sweden’s money moved to reflect changes in the inflation rates, implying that changes in money supply are not the causes of the inflation levels in the country. Money and quasi money supply growth in the country remained between 6% and 20% before the 1990 recession.

The sharp drop in money and quasi money supply growth in 1989-1990 were as a consequence of the unexpected high inflation rates experienced in the same period, causing the Riksbank to react accordingly in order to contain the high inflation rates. In Sweden, the Riksbank is responsible for supplying money in the economy, implying that the bank has an important role in keeping inflation levels competitively low.

As per the theoretical model of money supply and inflation, increases in money supply will lead to inflationary pressures. Monetary policies are not always enough in the maintaining stable inflation levels because the inflation rates may also be influenced by changes to the global economy. Sweden was affected by the oil crisis in 1970 and the recent global financial crisis in 2008.

Works Cited

World Bank. “World data Bank.” World Bank. 2010. Web. 04 April. 2011

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