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Fast Comment SwedenCalm down! Inflation is "low" but March reading offered little news

  1. Inflation remains far below Riksbank path, but no new surprises today
  2. Cases for both sides of the argument about hiking the policy rate or not
  3. Our main scenario is still a Riksbank hike in September
Inflation remains far below Riksbank path, but no new surprises today
The March CPI report shows headline CPIF inflation easing one tenth to 1.8 percent, and thereby remaining far below the most recent Riksbank's forecast, from its February report. Back then, none of the 2019 inflation prints were yet available, and the large downside surprise for the Riksbank was the January reading. With the February CPI report, the Riksbank's problems were compounded when there was no quick rebound toward the Riksbank's forecast path. Hence, today's inflation reading offered little news for the Riksbank to digest ahead of its meeting on April 24 (announcement April 25). Admittedly, for those inclined to stare at hundredths, the Riksbank forecast error actually increased to 0.5, from 0.4 percentage points (after rounding), but we see this as irrelevant, as explained below. The March inflation was roughly in line with our new forecast in Tuesday's macro report "Meagre shelter for the global economy" and with the up-to-date analyst consensus.
Cases for both sides of the argument on whether to hike the policy rate or not
The last three inflation prints give the Executive Board of the Riksbank a lot to discuss at its next meeting, and can be used to make a case for both sides of the argument on whether to hike the policy rate or not later this year. One could say the forecast error has just become worse and worse, reaching 0.5 percentage points today. However, the worsening follows erratic energy prices - volatility that the Riksbank is usually patient with short term. Additionally, next month we forecast inflation to pick up again, shrinking the distance to the Riksbank's forecast path. In fact, there is already an upside risk to our 2 percent CPIF estimate for April, as both fuel and electricity prices are on the rise. On the other hand, one can point out that overall the Riksbank's broad range of underlying inflation indicators has been faring better than headline CPIF inflation. In that sense, inflation may not be seen as particularly "disappointing". Lastly, it should be remembered that inflation is still close to target, and above the average for the period of inflation targeting in Sweden, not "low" in this sense.
Our main scenario is still a Riksbank hike in September
We forecast a pickup in CPIFXE inflation over the coming year (and it surprised marginally to the upside today), before an expected downturn in the economy begins to bite, and the inflation conditions suffer. Energy prices will continue to result in volatile CPIF developments. However, paired with our forecast for a still strong labour market this year, our main scenario is that the Riksbank will hike the policy rate in September. After that we think the Riksbank will have to reconsider and pause at 0 percent throughout 2020 and 2021.


March inflation roughly in line with our new forecast, but below Riksbank path  



Excl energy marginally higher than expected, as food prices turn out stronger than our estimate



Core goods the most important upside surprise, while volatile components dampened overall outcome 


Source: Macrobond


Disclaimer

Johan Löf

Senior Economist

Sweden

jolo22@handelsbanken.se

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