Inflation reduces the value of money through increases in the general price level in an economy. The most common way to measure the inflation rate is through changes in the Consumer Price Index (CPI). The CPI measures the average price of a basket of consumer goods and services that reflects household consumption.
In the 1970s, inflation rates increased rapidly throughout the global economy, mainly due to the oil crisis. However, as the majority of the OECD members adopted a restrained monetary policy in the 1980s, the international inflation rate was checked and began to decrease. Since then, inflation rates have been low throughout the global economy.
Sweden, however, saw another period of rapidly increasing inflation in the late 1980s. The reason behind this increase was a combination of a very expansive economic policy financed by large budget deficits, generous wage increases and repeated devaluations of the Swedish currency, the Krona. In the beginning of the 1990s, Sweden faced a severe economic crisis which saw the currency change from a fixed to a floating exchange rate, which also affected the inflation rate. To curb this development, Sweden changed its monetary policy to focus more on ensuring price stability. For example, the Swedish government tasked the Swedish Central Bank, the Riksbank, with keeping the inflation rate at approximately two per cent. As a result of these efforts, the inflation rate fell to record low levels.
The change in inflation policy and toughening international price competition have also contributed to historic low rates of inflation both in Sweden and in other countries since the beginning of the 1990s.