Norges Bank projects a gradual decline in inflation

In the December 2000 Inflation Report, Norges Bank projects consumer prices to increase by 3 per cent in 2001 and 2½ per cent in 2002. Price inflation is projected at an average 2¼ per cent for the period 2003-2004. The inflation projections are based on the assumption that interest rates move in line with market expectations, as implied by forward rates on 14 December. The fall in forward rates has been so pronounced that this has influenced the projections for price inflation and economic developments. Given an interest rate at around the current level, the inflation projection would be a little less than 2 per cent from the end of 2002. The estimates for 2002 exclude the isolated and temporary effect of a halving of VAT on food with effect from 1 July 2001.

The labour market is tight. The rate of increase in labour costs is estimated at 5 per cent in 2000 and 2001, and 4½ per cent in 2002. As an average for the period 2003-2004, wage growth is projected at 4¼ per cent.

The economy is expected to expand at a slower pace in the first half of next year. Growth is then projected to pick up somewhat from the second half of 2001. Mainland GDP growth is estimated at 1¼ per cent in 2001, 1¾ per cent in 2002 and an average 2 per cent in the period 2003-2004. The estimates imply an increase in the household saving ratio over the next two years compared with this year. On the other hand, higher public spending on goods and services is contributing to sustaining overall demand. In addition, petroleum investment is now expected to exhibit only a moderate decline.