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Fast Comment SwedenPreview of inflation in October; Unemployment data also released in week ahead

  1. Does October CPI have a role to play in the Riksbank's next policy decision?
  2. We stick to our forecast of gradually rising underlying inflation over the next couple of years
  3. Some risks to October inflation; keep an eye on the unemployment report
Does October CPI have a role to play in the Riksbank's next policy decision?
It may appear that October CPI is set to be uneventful. After all, inflation looks to be roughly unchanged since September and virtually in line with the Riksbank's forecast (see table and graphs below). But while we judge that it would require dramatic inflation disappointments to stop the Riksbank from raising its policy rate this winter, even moderate surprises could still have a part to play. In our view, the Riksbank's choice between a December or February rise is genuinely uncertain, so inflation trends over the next two months could be a factor that tip the balance toward one way or the other. Our main scenario is February, but with a similar probability for December.
We stick to our forecast of gradually rising underlying inflation over the next couple of years
Even if the Riksbank's choice of timing for the rise will cause some market reactions, it hardly has implications for the Swedish economy. More importantly, our inflation forecast implies that the Riksbank achieves its target in the medium term and continues to raise the repo rate. Admittedly, it is likely that CPIF inflation temporarily dips well under two percent next year as energy prices start to decrease, thereby breaking the recent sky-rocketing trend. However, indicators for underlying inflation all picked up last month and we see the gradual positive trend continuing to support headline CPIF in the coming years. The positive near-term inflation outlook is supported by leading indicators, such as producer prices, not least for food, which are boosted by the weak exchange rate, weather effects and economic climate (link to our new forecast report: https://bit.ly/2JNvZQp).
Some risks to October inflation; keep an eye on the unemployment report!
Switching focus back to October's CPI details, there are several risk factors. Last year's October monthly changes in clothing and shoes, air fares and package tours were all weaker than we forecast for this year. Such relatively brisk rates should be seen in light of recent disappointments and rebounds are common. For core services, the opposite is true, with a cautious October forecast. In other news next week, the October labour force survey is released. We expect a marginal decrease in seasonally-adjusted unemployment.

All set for an uneventful October CPI? Inflation looks roughly unchanged since September 

Please note that the Bloomberg survey is not yet available.


More important: our inflation forecast implies the Riksbank achieves its target over the medium term



We see underlying inflation continuing to support headline CPIF ahead



Prices for food and services set to increase faster than normal next year...


 


...a forecast that is supported by leading indicators, such as producer prices 




Next week also sees October data for unemployment; we expect slight decrease





Disclaimer

Johan Löf

Senior Economist

Sweden

jolo22@handelsbanken.se

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