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Fast Comment SwedenDownside surprise in August inflation partly temporary, but the Riksbank will likely face new disappointment this autumn

  1. Temporary factors weighed on inflation
  2. Inflation should pick up this autumn, but less than the Riksbank's forecasts; we stick to our call that a rate rise will be called off
  3. Inflation expectations show faith, but not unlimited faith, in the Riksbank
Temporary factors weighed on inflation
The August CPI report shows headline CPIF inflation at 1.3 percent, well below expectations and the Riksbank's forecast, although some of the slower price increases are temporary. Fruit and vegetable prices will bounce back and summer sales of clothes, especially sports goods, appear to have dragged on well into August. Come September, these components will likely show faster price rises again.
Inflation should pick up this autumn, but less than the Riksbank's forecasts; we stick to our call that a rate rise will be called off
At the same time, the inflation tide seems to be slowly turning, with slowing underlying inflation ahead. We forecast a pickup in inflation prints during the autumn and winter, but not as much as the Riksbank has forecast. At least underlying inflation is set to disappoint the Riksbank, while still turning out at healthy levels in a historical perspective. All in all, the near-term outlook will, in our view, undermine the Riksbank's view that the economy is trending as expected. We stick to our view that the Riksbank will be forced to call off planned policy rate rises in 2019-21.
Inflation expectations show faith, but not unlimited faith, in the Riksbank
Today's third-quarter inflation expectations report shows there is still faith in the Riksbank's inflation target, after last month's scare in the narrower money market players' survey. In other words, we were right to argue that last month's print was a shaky summer data point that should be largely disregarded, as money market expectations rebounded today. Faith in the Riksbank is not unlimited though, as today's wider survey shows agents hedging even their long-term inflation expectations in the face of a deteriorating business cycle, lower current inflation prints and worries about monetary policy potency at this juncture (see graphs and additional details below).

August inflation below expectations 

August inflation: Downside surprises in food prices and goods prices 

Our inflation broadness indicator signals that the Riksbank's underlying inflation indicators may well continue to cool when published later today

One reason to worry about the inflation outlook is that more and more prices have stagnated, or started to fall outright 

We will have to update our inflation nowcast after today's low outcome; the main message remains the same: inflation will pick up this autumn and winter, but less than the Riksbank has forecast, at least in terms of underlying inflation (here illustrated by CPIFXE) 

Energy prices are now dampening inflation 

Compared with last quarter, today's third-quarter print of long-term inflation expectations among all respondents in the wider Prospera survey was a slight decrease. It is the usual correlation, however, that even the long-term expectations are affected by current inflation prints. While the median expectation remains at two percent in a show of faith in the Riksbank's inflation target, the fact that the mean has moved shows that this faith is not unlimited. Moreover, as monetary policy toolboxes around the world look more empty than normal, it is no wonder that agents in the economy hedge their bets on even long-term inflation.

Money market players' expectations normalised after last month's very low response rate had produced non-representative survey results. In the September survey, the long-term expectations picked up, in terms of both mean and median. At the same time, the uncertainty band narrowed substantially.


Johan Löf

Senior Economist


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