Monday, June 09, 2008

Sweden's Central Bank Acknowledges Reality

The Swedish Central Bank today announced that they will no longer be using a measure of "core" inflation to set monetary policy. To my knowledge this is the first central bank in the world to acknowledge that depending on "core" inflation is a worthless exercise:

”Our target variable is the CPI. We want to be clear about this. Our strategy and our inflation target stand firm. Over the years, another measure of inflation, the CPIX, has played a prominent role alongside the CPI. The Riksbank has previously assumed that the CPI and the CPIX will converge in the long-term. We no longer believe that this will be the case. The CPIX will be phased out, but this will not have a tangible effect on future interest rate decisions.” These comments were made by Deputy Governor Barbro Wickman-Parak in a speech held at Swedbank today.

They are dumping the idea that core and overall inflation will converge in the long run. They've been running the central bank based on an indicator that they now acknowledge is flawed. Don't expect the Fed to follow suit anytime soon.

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