Fast Comment Sweden - Macro Research - Handelsbanken Capital Markets


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Fast Comment SwedenPreview of April inflation: Close to target, but somewhat lower than March

  1. Last underlying inflation scare before upward trend is rediscovered
  2. Growth peak might be behind us, but the level of activity will stoke inflation lastingly
  3. Risks to April inflation estimate includes - you guessed it - air fares!
Last underlying inflation scare before upward trend is rediscovered
We expect CPIF inflation to have softened marginally in April, but at 1.9 percent it remains in line with the inflation target. The Riksbank and consensus agree with our call on the April reading (see tables and charts below). We also expect a slight deceleration in CPIF excluding energy. In our view, this will be the last real scare before worries about underlying inflation start to abate and focus shifts back to the multi-year upward trend in inflation. This impending rediscovery of inflation optimism contributes to our forecast for a hike of the policy rate in December.
Growth peak might be behind us, but the level of activity will stoke inflation lastingly
There are signals of slowing growth, both in Sweden and several of its important trading partners. However, leading indicators signal that growth will be sufficiently fast for the booming business cycle to strengthen even further in the near term. Also, remember that inflation lags the business cycle. The bottom line is that underlying inflation will be boosted for years. In support of this forecast, there is a wealth of strong forward-looking inflation indicators. On top of this, various breakdowns of price changes in the CPI basket give the impression of a broad-based rise in inflation. Naturally, we continue to monitor the muted wage increases of the last few years, when forecasting medium-term inflation, and hence the policy rate path of the Riksbank. At least this year has started on a positive note, as the business-cycle sensitive private sector wage increases accelerated slightly.
Nitty-gritty: Risks to April inflation estimate includes - you guessed it - air fares!
We see several risks to our April estimates. First, the Easter holiday effect on air fares did not really materialise in March CPI. Even if Easter actually occurred in March, it is worth noting that most of Sweden's schools had their Easter break in early April. In previous years with a similar calendar, the school break has not been enough to stop air fares from falling in April. Might this year be different? The important message, though, is that air fares in May are usually easier to predict, i.e. any surprise in April should be strictly temporary and cancelled out in the May CPI. Furthermore, electricity prices have been substantially elevated during the winter, but are now easing somewhat. The high levels, volatility and market rules changes at the start of 2018 have generated some electricity price forecast errors for us. Hopefully, that does not continue. Finally, there might be a significant negative base effect from last year's rise in banking service prices, stealing the headlines on Wednesday. In the grand scheme of things it is irrelevant, however.

 CPIF inflation once again close to the Riksbank's 2 percent target, as energy prices are soaring

Easter holiday boosted last year's April service prices - this year Easter occured in March

Inflation close to 2 percent for second consecutive year 

 But for the time being it is rising energy prices that have lifted inflation the last bit of the way to the Riksbank's target


 There is a positive trend in inflation waiting to be rediscovered

 Price decreases in CPI basket very uncommon right now 

 And price increases around 2 percent have become very common

 One risk to April CPI: air fares higher, lower or sideways?

 GDP indicators might have peaked, but inflation indicators are still on the rise and the weak krona will push CPI even higher.


Johan Löf

Senior Economist


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