Norges Bank

Press release

Higher projection for price inflation and greater uncertainty

Norges Bank projects consumer prices to rise by 2½ per cent in 1997 and 2¼ per cent in 1998. The projection for price inflation in 1998 has been revised upwards by a quarter percentage point compared with the June Inflation Report.

The underlying rise in consumer prices, ie excluding changes in indirect taxes and electricity prices, is edging up, and is estimated at 2 per cent in 1997 and 2½ per cent in 1998. Price inflation in Norway is expected to be slightly higher than among trading partners both this year and next.

The uncertainty associated with the existing pressures in the economy is underlined in the report. This primarily applies to the effects of a potentially tighter labour market on wage formation. The projection for price inflation is based on the assumption of moderate wage settlements. On this basis, wage growth is projected at 4 per cent in 1997 and 4½ per cent in 1998.

Several indicators point to growing shortages of labour and other factor inputs. The effects of an alternative scenario with a more expansionary fiscal policy and a wage catch-up subsequent to the wage restraint shown earlier in the 1990s are illustrated in a box in the third-quarter report. The estimates derived from the assumptions underlying such an alternative scenario indicate that inflation may reach 3½-4½ per cent over a two year period, with clear signs of a continued rise in prices.

Commenting on the situation, Central Bank Governor Kjell Storvik underlines that the uncertainty in the Norwegian economy is now greater than it has been for many years. There is a substantial risk that price and wage inflation will rise to a level exceeding the projections presented by Norges Bank in this report. According to the Governor, wider safety margins in the economic policy pursued would therefore have been desirable with a view to responding effectively to this alternative scenario.


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Published 1 October 1997 00:00