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Fast Comment SwedenInflation drops below Riksbank target as years of fast energy price rises finally come to an end

  1. Inflation at lowest since early 2018, marking the start of a longer fall
  2. Will the Riksbank Executive Board look through this soft patch driven by energy prices?
  3. More dark clouds forming on the horizon - we stick to our forecast that the Riksbank will cancel planned rate rises

The June CPI report shows that headline CPIF inflation decelerated sharply to 1.7 percent y-o-y, its lowest level since February 2018. The deceleration was caused by a drop in energy prices, while CPIF excluding energy (CPIFXE) prices instead picked up to its fastest pace since mid-2017, 1.9 percent y-o-y. The outcome was in line with our estimates, as well as the Riksbank's and the consensus median.

Today's inflation print marks the start of a longer fall in CPIF inflation, lasting for the remainder of 2019, as support from large positive energy price contributions seen over the past couple of years is now history.

But underlying inflation is by most accounts still healthy - here illustrated with our upward trending nowcast for CPIFXE (in June core goods and core services were stronger than expected, while volatile components were weaker). So, could the Riksbank Executive Board choose to look through the soft patch in headline CPIF inflation, since it will mainly be driven by slowing energy price rises? Note that during last week's press conference, Governor Ingves indicated it would would, if waning energy prices are the Riksbank's only worry. That is a big if.

We do not see the Riksbank Executive Board as having the luxury of dealing only with energy prices going forward. More dark clouds are forming on the horizon, as the Swedish economic climate is cooling off. Even though inflation usually lags the overall economy, some forward-looking indicators for inflation have already peaked, e.g. the NIER sentiment survey (graph below, next large quarterly release July 25, stay alert!). We stick to our forecast that the Riksbank will eventually be forced to cancel its planned policy rate rises and stay on hold at -0.25 percent during our forecast period of 2019-21.


Johan Löf

Senior Economist


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