Riksbank Should Review Inflation Gauge Switch, Jansson Says

The Riksbank needs to look at changing its main inflation gauge since it exaggerates the problems Sweden faces with low inflation, Deputy Governor Per Jansson said.

The consumer price index it now uses includes changes to mortgage costs and therefore declines when rates are reduced, as they have been now. Using a different measure would better capture underlying developments, Jansson said.

“It should certainly be reviewed” in the future, Jansson said in a March 12 interview in Stockholm. The bank “would be stupid” not to review it, he said. “If we have new experiences it makes good sense” to “think whether a change is warranted.”

The bank last month cut its main lending rate to an unprecedented minus 0.1 percent and started buying government bonds to battle deflation, which has plagued the Nordic region’s largest economy for most of the past two years.

The currency was little changed at 9.1379 per euro as of 6 p.m. in Stockholm.

Headline CPI has declined in 11 of the past 14 months, while consumer prices adjusted for mortgage costs, or CPIF, haven’t dropped on an annual basis since at least 1980. CPIF rose an annual 0.9 percent last month, still far below the Riksbank’s 2 percent target.

A predominance of floating-rate mortgages versus fixed may also make CPI a less ideal measure. At Swedish state-owned mortgage lender SBAB, 82 percent of new loans had variable short-term rates in February, the highest level in almost five years.

Deflation Focus

According to Jansson, the discussion has focused too much on deflation rather than on underlying consumer prices. Nobel Laureate Paul Krugman has likened the Swedish situation to Japan’s deflation spiral.

“Certainly this talk about Sweden being Japan and Sweden is having deflation and all of that can’t be, I guess, positive for confidence in terms of what people think,” Jansson said. The exact negative effect is difficult to know, he said.

Sweden opted to keep its main gauge after considering replacing it with an underlying price measure in the late 1990s, according to Jansson. He then sided with those arguing for status quo, something Jansson says he now regrets.

“I would probably have argued that we should have switched to another measure to get rid of this strange effect” of mortgage costs on inflation, he said.

The bank should also look at whether to re-introduce the tolerance interval of one percentage point around the target while changing the 2 percent target isn’t in the cards, Jansson said.

“The target level you should be extremely careful with changing because as soon as you do it once, what says that you can’t do it again and suddenly you have a downward spiral in terms of confidence and credibility for your target,” he said.

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