Mats Hammarstedt portrait photo

Why are prices going up? Questions and answers about the inflation

Recent times have been characterized by rising prices and economic uncertainty. Here, Mats Hammarstedt, professor of economics, answers questions about prices and inflation asked by Linnaeus University's social media followers.

Does higher inflation lead to higher unemployment?

Typically, we can expect unemployment to fall as inflation rises. This applies if inflation is driven by high demand. But at the present, inflation is primarily driven by disruptions in supply that lead to high costs. Therefore, we can get a situation with both higher inflation and high unemployment.

Does purchasing power have to decrease for inflation to decrease?

The most important thing for inflation to go down is that the disturbances on the supply side in the economy disappear and production increases. If the war ends and production disruptions in the world cease, inflation will decrease.

What are politicians doing to lower prices and reach the inflation target?

Sweden’s central bank raises the interest rate to reduce demand in the economy. This causes inflation to fall. Fiscal policy is also used. The latest budget is relatively tight so as not to increase demand and thus also inflation.

How long can inflation be expected to last?

It is very unclear. Throughout the autumn, the forecast was that inflation would fall back quickly, but that has not happened. There is a great uncertainty, which also affects the rate at which the central bank changes the interest rate.

If prices rise, does that also mean that wages will rise?

It is important that inflation does not lead to increased wage demands. Restrained wage requirements lead to reduced real wages in the short term but also make it possible to bring down inflation.

Is inflation linked to the war between Russia and Ukraine?

Inflation is definitely tied to the war. Above all, the war has caused production disruptions and reduced supply of several goods. Even the shutdowns in many countries during the Corona pandemic have led to production disruptions, which means that prices have increased.