Inflation expectations are important for firms’ price-setting behaviour and wage formation, and thereby also for inflation. If economic agents are confident that inflation really will be kept low, firms will not consider it necessary to change their prices as often when, for instance, they perceive a rise in costs to be temporary. In the same way, stable inflation expectations can result in moderate wage increases, which facilitates the Riksbank’s aim of achieving price stability.
Consequently, the fact that inflation expectations are firmly anchored at the Riksbank’s target is no reason for the Bank to leave the repo rate unchanged. Rather, this should be taken as a sign that the public expects the Riksbank to do what is necessary to ensure that inflation is 2 per cent. In other words, inflation expectations can be seen as a measure of the public’s confidence in the Riksbank to attain the inflation target.
However, if inflation expectations are above target, it suggests that the public does not believe that the Riksbank will manage to keep inflation in check. The Riksbank may then need to raise the repo rate more rapidly than is reflected in expectations of future monetary policy. In this way, different measures of inflation expectations and market expectations of monetary policy serve as a supplement to the Riksbank's inflation forecasts.