Sweden: Selected Issues

IMF Staff Country Reports, March 11, 2024

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Sweden: Selected Issues

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Bibliographic details

• Published: March 11, 2024
• Series: IMF Staff Country Reports
• DOI: https://doi.org/10.5089/9798400270215.002

Inflation developments and drivers

• Inflation in Sweden started rising sharply from June 2022.
• The paper analyzes inflation developments, drivers, and risks in Sweden using a Sweden-specific Phillips curve (PC).
• Dynamic simulations of the estimated PC are used to assess the role of external factors in driving recent inflation.
• Growth in the gross domestic product deflator (as one measure of inflation) can be decomposed into three components—profits, labor costs, and taxes—to assess inflationary pressures in the economy.

Unexplained inflation and factors outside the PC

• Several factors that are poorly captured in the PC analysis may account for the rise in unexplained inflation.
• Core inflation could be sticker if the price setting becomes de-anchored or more backward looking.
• Increasing inflation expectations, including because of renewed exchange rate pressures, would feed into higher inflation.

Risk scenarios and channels

• Illustrative risk scenarios confirm a wide range of possible inflation paths in either direction.
• Specific risks identified that could delay the return of inflation to target:
  • Renewed commodity price shocks.
  • Smaller-than-estimated slack in the economy.
  • Renewed exchange rate pressures that raise inflation expectations.
• Channels emphasized:
  • External factors (assessed via the PC dynamics).
  • Domestic price-setting behavior and expectations.
  • Decomposition into profits, labor costs, and taxes as transmission channels for inflationary pressures.

Methodology and scope

• Uses dynamic simulations of an estimated Sweden-specific Phillips curve (PC).
• Complements PC analysis with decomposition of GDP deflator growth into profits, labor costs, and taxes.

Content in this bundle

• Sweden: Selected Issues; IMF Country Report No. 24/71; February 20, 2024
  • Sweden: Selected Issues; IMF Country Report No. 24/71; February 20, 2024 (Markdown version)
  • Sweden: Selected Issues; IMF Country Report No. 24/71; February 20, 2024 (PDF)