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Fast Comment SwedenPrices, prices, prices! Triple treats in week ahead: CPI, inflation expectations and housing prices

  1. Expected pickup in April inflation might appear temporary at first glance...
  2. ...but we increase our near-term outlook, albeit maintaining a downbeat view for next year
  3. Are inflation expectations sliding, as the Riksbank governor claims? Plus, slight rise in housing prices expected
Expected pickup in April inflation might appear temporary at first glance...
We expect the April CPI report to show headline CPIF inflation picking up from 1.8 to 2.1 percent y-o-y (released Tuesday). This is fully in line with the most recent Riksbank forecast, but among other forecasters not everyone agrees. Behind our forecast lies a renewed rise in energy price increases, but also a small acceleration in CPIF excluding energy. The latter is fuelled by a temporary spike in travel prices, as the Easter price peak occurred in April this year, rather than partly in March like last year. With April inflation having been driven by volatile energy prices and a spike in air fares, what can we expect later in 2019?
...but we increase our near-term outlook, albeit maintaining a downbeat view for next year
At the moment, we forecast inflation to surpass the Riksbank's estimate over the next twelve months. Admittedly, some leading indicators have deteriorated since we published our latest full macro report on April 9, which raises questions about underlying inflation. However, on the other hand the krona has weakened substantially and we end up increasing our CPIF excluding energy forecast, putting it close to the Riksbank's view, but adding on a fresh take on energy prices, we find that headline CPIF will be even higher. First, electricity price futures are trading higher, as there is still a clear deficit in the outlook for hydro power output (please see graph below). Second, the oil price is now more established at a higher level than had been the case when we finalised our macro report. However beware, just as energy prices can quickly push up the year-ahead inflation outlook, they can swing back down in a heartbeat, shaving several tenths off near-term headline inflation. The bottom line is that CPIFXE is still forecast to rise, before turning lower again next year when we think the economy will have cooled more materially.
Are inflation expectations sliding, as the Riksbank governor claims? Plus, slight rise in housing prices expected
Among other news, we look forward to getting our hands on the Prospera inflation expectations on Wednesday. As the Riksbank’s deputy governor Per Jansson pointed out in recent parliamentary hearings, surveys are merely one indicator of expectations in the economy and this month only the slim money market player version of Prospera is updated. Still, in and around the time of the April monetary policy decision Jansson has been pointing to sliding inflation expectations, worrying about insufficient anchoring at the inflation target. Moreover, Prospera is after all a survey commissioned by the Riksbank itself. So are we seeing signs of poor anchoring? Not necessarily, judging from the view of money market players. While it can be worrisome that *long-term* expectations have slid somewhat, seemingly in response to current events that may well turn out to be no more than *short term* cyclical fluctuations, there are also more reassuring signals in the data. Not least, there is no longer a downward bias in respondent's inflation outlook uncertainty, despite the widespread view that monetary policy is close to the effective limit of expansionary measures. Also, Friday sees the April HOX housing prices, and we expect stable to slightly positive monthly developments after having seen yesterday's release of the Svensk Mäklarstatistik housing prices data.

Please see graphs and comments below:

April CPI: we expect inflation to pick up, much in line with the Riksbank's latest forecast  



April CPI: eye-catching acceleration in energy price rises, but the boost to the service price heavyweight is also important 



Admittedly, services prices expected to have been driven by temporary Easter effect on travel prices... 


 

...but in the end we see quite high inflation even beyond the April outcome


Source: Macrobond



Levels in hydro power reservoirs have risen with the early arrival of spring, but the deficit in the hydrological balance remains after last year's drought and the past winter's thin snow cover. Hence, the electricity price will likely stay elevated.



Near-term lift in CPIF excluding energy signalled by both leading indicators still on the strong side and lagging effect of krona weakening 



Long-term inflation expectations close to Riksbank target, and money market players express low uncertainty. Moreover, risks are no longer biased to the downside.




HOX housing prices likely to have remained stable in April, or even increased slightly, according to the more timely data from Svensk Mäklarstatistik



Disclaimer

Johan Löf

Senior Economist

Sweden

jolo22@handelsbanken.se

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