The idea that prices will be falling with time might seem like manna from heaven for consumers at first sight, but received economic wisdom suggests that it can trigger falling demand and ultimately increased levels of unemployment. Japan has been struggling with deflation for more than two decades and its government is actively trying to use monetary policy to break the cycle.
In the Eurozone, concerns have been raised that inflation has fallen too far below the ECB target figure of 2% and that some stimulus measures may be introduced to inject inflation into the economy (traditionally, this is done through accommodative monetary policy).
Sweden is a member of the European Union, but like the UK, chose not to join the Euro and retains its own currency, the Swedish Krone. This gives the central bank more flexibility than is the case for national banks in Eurozone states. Sweden’s central bank believes that the inflation figure for the Swedish economy in 2014 will come in with a deflation of 0.2%. Consumer prices fell by 0.4% in September; the seventh fall in nine months, which has spurred the central bank into action. In a bid to inject inflation into the economy, the central bank has cut its interest rate by 0.25% to zero, a record low level, obviously. The bank has indicated that the rate will be held until inflation recovers. It is anticipating that inflation will hit 0.4% next year which is well below the target level of 2%, a level not seen since early in 2012.
The Swedish economy is regarded as doing quite well; the bank anticipates that unemployment will ease by 0.1% to 7.9% next year and that growth should come in at 2.7%.