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Fast Comment SwedenPreview of June inflation: Remaining above the Riksbank target; risks tilted to the upside

  1. Inflation once again above 2 percent, but probably lower than the new Riksbank forecast
  2. Uncertainty elevated during summer months; we might be overly cautious
  3. Upward trends in energy prices and underlying inflation paving the way for a rate hike
Inflation once again above 2 percent, but probably lower than the new Riksbank forecast
We expect the June CPI data to show CPIF inflation at 2.2 percent y-o-y (due Thursday July 12). This would extend the run of readings in line with the Riksbank's inflation target to more than a year. At the moment, energy price increases are among the most important contributors to headline inflation, and we forecast that CPIF excluding energy will rise more moderately, 1.4 percent y-o-y. Therefore, the fresh-off-the-press Riksbank forecasts appear too optimistic for June (see graph below; CPIF 2.4/CPIF excl. energy 1.6 percent y-o-y).
Uncertainty elevated during summer months; we might be overly cautious
That said, risks to our estimate are probably tilted to the upside. First, amid large electricity spot price swings, our different models yield a broad range of forecasts for consumers' electricity prices, with our call on the cautious side. Second, a weak krona and expensive fuel suggest international travel prices should rise this year. However, the start of the year has not been convincing and now the summer weather is better than normal domestically, which could dampen demand. Will there be a comeback in travel prices or are our modest assumptions justified (see graph)? Lastly, clothing and shoe sales show a predictable seasonal pattern, but the magnitude is difficult to pin down. We forecast that summer developments will be similar to last year's, despite a weaker krona and indicator models advising us to go higher. Bottom line: June and the rest of the summer are likely to be messy, so remember to look past the noise.
Upward trends in energy prices and underlying inflation paving the way for a rate hike
The energy price rise is now a trend and therefore likely to result in second round effects that lift underlying inflation ahead. Already, there are signs that energy prices are stoking inflation expectations. Together with the long-standing but modest upward trend in underlying inflation, the case for CPIF inflation to remain at (or above!) the Riksbank target is strong. We continue to expect the Riksbank to deliver a rate hike in December.


 Energy prices picking up again in June, driving headline inflation above the Riksbank's target



The Riksbank has now revised up its forecasts close to ours, but we see a slightly weaker June outcome



In recent years, summer sales have been earlier, but uncertainty has been just as large



We might be too cautious on package tour prices, and extra uncertainty after method change in 2017



Energy price on course to boost inflation and, crucially, inflation expectations also in coming months 


Source: Macrobond



Disclaimer

Johan Löf

Senior Economist

Sweden

jolo22@handelsbanken.se

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