The Riksbank’s target achievement does not look better with CPIF and CPIX inflation, or with HCIP inflation

Updated on May 3, 2015.
English translation of Ekonomistas post (in Swedish).

The Riksbank’s inflation target is 2 percent for CPI inflation. Average inflation since 1995, when the inflation target started to apply, is only 1.3 percent. Target achievement is thus bad, especially when one compares with other central banks that have had inflation target as long as the Riksbank. The Riksbank has usually defended itself by noting that target achievement is better for other measures of inflation, namely inflation measured by the price indices CPIF and previously CPIX. But a closer look shows that target achievement does not look better with CPIF and CPIX inflation. Neither does it look better with HICP inflation.

The Riksbank’s inflation target is 2 percent for the annual increase in the consumer price index, CPI. The target applies from 1995. I have in a previous post shown that target achievement is bad and that the Riksbank has systematically undershot the inflation target. Other central banks that have fixed inflation targets as long as the Riksbank, such as the Reserve Bank of Australia, Bank of Canada, and Bank of England, have achieved their targets much better, as discussed in this post. This indicates that it has been possible for the Riksbank to achieve its inflation target as well.

Figure 1 shows the target achievement, updated with data through March 2015. The grey line shows annual CPI inflation. Since the fall of 2012, inflation has been around zero. In March, 2015, it was 0.16 percent. The red line shows, for each date, average inflation since 1995. We see that average inflation from 1995 to March 2015 is only 1.3 percent, substantially below the inflation target of 2 percent. The blue curve shows 5-year moving averages. We see that the last 5-year average is 0.9 percent.[1]

The figure shows that until a year ago, average inflation from 1995 seemt to have stabilized around 1.4 percent. This gives the impression that the Riksbank has effectively had an inflation target of around 1.4 percent instead of 2 percent.


Figure 1. Annual CPI inflation, average from 1995, and 5-year moving average. Source: Statistics Sweden.

The Riksbank usually defends itself against comments about the large and systematic deviation from the target by stating that target achievement is better for another measure of inflation, namely a measure of underlying inflation that uses the price index CPIF, introduced in 2008. It states this, in spite of the box in the Monetary Policy Report 2008/2 that introduced the CPIF emphasizing that “The inflation target is, as earlier, defined in terms of the CPI” and “the focus is on the target variable, the CPI” (p. 54).

The CPIF differs from the CPI in that housing costs of homeowners are computed for a constant mortgage rate. This means that the CPIF misses the long-run global trend in world interest rates and also Swedish mortgage rates that we have seen since the 1990s, a trend that depends on fundamental real factors. The Riksbank sometimes says that the difference between the CPIF and the CPIF depends on the Riksbank’s own policy-rate cuts, but this is misleading. Monetary policy cannot change a global trend in real interest rates; it must follow the trend. Ben Bernanke made this point in his first blogpost. The policy rate can only temporarily deviate above or below the trend. Thus, the difference between the CPI and the CPIF depends on the trend in real interest rates, not on the Riksbank’s monetary policy.

Thus, inflation measured with the CPIF has a bias relative to inflation measured with the CPI. The bias is a large as 0.4 since 1995. CPIF inflation hence gives a misleading measure of the Riksbank’s target achievement. The fact that the CPIF includes the effect of rising housing prices on the housing costs of homeowners adds to the bias. This is especially so, since falling mortgage rates everything else equal increases housing prices. From this point of view, it may be better to exclude homeowners’ housing costs altogether than introduce a bias by holding mortgage rates constant. (Even better would be to include a trend in mortgage rates in CPIF.)  Before 2008, the Riksbank used another measure of underlying inflation, the CPIX, which excludes households’ mortgage costs. The HICP, the Harmonized Index of Consumer Prices, excludes housing expenditures by homeowners. (More on the HICP below.)

Figure 2 shows the same averages as figure 1, but for inflation measured with the CPIX through March 2008 and with the CPIF thereafter (so as to correspond to the measures of underlying inflation the Riksbank used in real time) . The deviation from the target is smaller than when inflation is measured by the CPI. But the figure still shows a systematic deviation from the target also for this measure of the target. Furthermore, the deviation is growing over time, as shown by the red line, the average from 1995. Average CPIX/CPIF inflation from 1995 to January 2014 is 1.6 percent. The 5-year average in March 2015 is 1,1 percent. After the Riksbank’s rapid policy-rate increases starting in the summer of 2010, CPIF inflation quickly fell from close to 2 percent in 2010 to around 0.5 percent in 2014.

Thus, the Riksbank’s target achievement does not look better with CPIX/CPIF inflation.


Figure 2. Annual CPIX/CPIF inflation, average from 1995, and 5-year moving average. (CPIX/CPIF inflation refers to CPIX inflation through March 2008 and CPIF inflation from April 2008.) Source: Statistics Sweden.

 Update: Target achievement in terms of HICP inflation

As mentioned, the HICP excludes housing expenditures of homeowners and avoids the bias of just holding mortgage rates constant. It also makes international comparisons easier. Figure 3 shows annual HICP inflation. After the increase in the policy rate 2010-2011, it fell quickly to close to zero in 2014. The average from 1995 to March 2015 is 1.5 percent, and the 5-year average in March 2015 is 0.9 percent.


Figure 3. Annual HICP inflation, average from 1995, and 5-year moving average. Source: Datastream.

In summary, the Riksbank’s target achievement does not look better with either HICP inflation or CPIX/CPIF inflation.



[1] The figure refers to real-time data on inflation, taking into account that before 2005, CPI inflation was measured by Statistics Sweden not as the annual percentage increase in the CPI but with a method that excluded substitution effects on the composition of the consumption basket. This made measured inflation on average 0.2 percentage points higher. From 2005, CPI inflation is measured by Statistics Sweden as the annual percentage change in the CPI. For details, see the box  “Changes in Calculation Methods for the Inflation Rate,” Inflation Report 2004/2, Sveriges Riksbank, p. 45-48.
When CPI inflation is measured as the annual percentage change in the CPI, the average from 1995 to March 2015 is 1.2 percent.