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Fast Comment SwedenWeek ahead: Inflation to hit short-term bottom, business production to confirm worsening sentiment data

  1. Inflation to have eased further in September, but near-term pickup awaits despite growth outlook doom and gloom
  2. A longer-lasting drop in inflation is not expected to take hold until next year
  3. Production growth to have stayed on downward trend, reinforcing our below-consensus GDP forecast

Inflation to have reached a trough in September, we forecast (CPI report released 10th October). But the impending inflation pickup this autumn and winter will be short-lived. During 2020, CPIF and various underlying inflation indicators (e.g. CPIF excluding energy) are forecast to come back down well below the 2 percent target, and possibly undershoot even historical averages.


We expect headline CPIF inflation to have cooled to 1.2 percent in September, the slowest price rise rate since 2016 and somewhat below the Riksbank forecast. More significantly for upcoming monetary policy decisions, the CPIFXE is undershooting the Riksbank forecasts...


...and many indicators of underlying inflation appear to be joining CPIF in its partly energy-price-induced deceleration. This supports our view that inflation will ease more durably next year, despite the fact that it is typically a late-cyclical economic variable.


Note that, even though it is blatantly clear that the economy is cooling off and leading indicators for growth suggest this deterioration will continue into 2020, there is also data showing late-cyclical cost and pipeline pressures that are very much alive. Labour costs keep rising, even in terms of wage drift, and that boosts domestic producer prices, while the weakening krona continues to lift imported inflation. This will probably spill over into 2020 and stoke inflation, all else equal. Our view is, however, that the cooling economy will take the upper hand sooner or later, and dampen inflation. Not least, against a backdrop of slowing global growth, it is uncertain if this winter's central wage negotiations will end higher, roughly unchanged or lower than the current agreement.


While there are plenty of business-cycle-related risks, primarily downside ones, to the inflation outlook, one near-term upside risk to our forecast is clothing and shoe prices. We are estimating that the low level lasts throughout the year, but note that healthy retail sales this year, positive sector confidence and a simple rule-of-thumb for the krona depreciation effect could suggest higher prices this autumn and winter. 


Another key data point next week is the August print for business sector production, the PVI (Production Value Index released on October 8). Given continuously weakening sentiment indicators, we now expect the PVI hard data to reinforce our view of slowing GDP growth, with a reading at 1.0 percent y-o-y (-0.2 percent, m-o-m).


The worst is yet to come, however. On the one hand, the overall leading indicator picture does not yet point to a recession in the overall business sector, but rather to growth somewhere between 0 and 1 (our below-consensus forecast for 2020 GDP growth is 0.8 percent). At the same time, the latest manufacturing indicators signal a contraction in the manufacturing sector. New orders in both the NIER survey and the PMI are significantly weaker than normal, so it will be very interesting to see how the Statistics Sweden gauge develops on Tuesday.


CPI September details:



Johan Löf

Senior Economist


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