Norges Bank: Risk of higher price and wage inflation
In Norges Bank's Inflation Report for the fourth quarter, consumer price inflation is projected at 1¼ per cent in 1996 and 2½ per cent next year and in 1998. Excluding indirect taxes and electricity prices, core inflation is expected to rise from 1½ per cent this year to 2¾ per cent in 1998, according to the projections.
This issue of the Inflation Report also presents projections for the period to the turn of the century. Consumer price inflation is estimated at about 3 per cent in 1999 and 2000. Wage growth is projected to rise from 4¼ per cent in 1996 to 4¾ per cent next year, and may increase to about 5¼ per cent as an annual average in the period 1998-2000. The estimates are based on historical information concerning wage formation as embodied in Norges Bank's macroeconomic model. However, Norges Bank emphasises in its report that greater wage moderation will result in lower price and wage inflation.
The projection for wage growth in 1997 is lowered from 5 to 4¾ per cent as profitability trends in the manufacturing sector appear to be somewhat weaker this year than previously assumed.
Norges Bank projects mainland GDP growth at 3½ per cent in 1996 and 3 per cent next year followed by an annual average of 2 per cent in the years to the turn of the century. Employment growth may decline from about 60 000 this year to about 20 000 as an annual average in the period 1998-2000. Unemployment is projected to edge down towards 3 per cent at the end of the decade.
Norges Bank underlines that there is a risk of stronger growth in demand and thereby higher price and wage inflation in the next few years. In the event of a more pronounced expansion, the economy may experience a deeper downturn towards the end of the 1990s.
Commenting on the Inflation Report, Governor Kjell Storvik states that the experience of the 1980s indicates that the formulation of economic policy should take due account of the risk of sharp fluctuations in the economy. Such fluctuations may have very costly and lasting consequences, for example in the form of competitive losses, unsound investments, and persistently higher unemployment.
"If the wage moderation approach, which contributed to restraining wage growth at the beginning of the 1990s, is continued, it will make it easier to maintain industry's external competitiveness and allow the economy to grow without the same pressures," says Governor Storvik.
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