Beyond the Headlines: Swedish Inflation and Labour Market Tightness During 2020-2022

Abstract: This thesis explores Swedish inflation and labour market tightness during 2020-2022. We decompose headline inflation into core inflation, captured by the weighted median inflation, and headline shocks. We use the modified Phillips curve as presented in Ball et al. (2022), where core inflation is determined by labour market tightness, long-term inflation expectations and pass-through from headline shocks. We construct a measure of vacancies to effective searchers (V/ES) based on the generalised labour market tightness measure proffered in Abraham et al. (2020). We find that our Phillips curve utilising V/ES performs better than the model using vacancies to unemployment in explaining Swedish inflation from 2001-2022. Our V/ES Beveridge curve is also more stable than the traditional Beveridge curve and experiences no shifts. Headline shocks during 2020-2022 in Sweden are then analysed and energy price is deemed to be the only statistically significant variable, accounting for slightly over half of the variation. We use the Swedish Riksbank unemployment projection to forecast inflation, finding that our model predicts inflation above the 2% target regardless of assumptions about inflation expectations. We suggest that a strong stance should be taken by the Riksbank to rein in inflation and prevent further de-anchoring of inflation expectations.