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Fast Comment SwedenInflation in June: Another step on the path to December rate hike

  1. Inflation once again above the Riksbank's 2 percent
  2. Usual for this time of year, noisy components affect inflation...
  3. ...but underlying inflation AND energy prices are paving the way for a Riksbank rate hike in December
Inflation once again above the Riksbank's 2 percent
The June CPI data shows CPIF inflation at 2.2 percent y-o-y. Outcomes for main aggregates were also as we had anticipated, despite the fact that summer inflation readings tend to be volatile (see table below). The outcome was roughly in line with expectations but slightly below the Riksbank's forecast (Riksbank's July report 2.4 percent y-o-y; our estimate 2.2; consensus median 2.3). At the moment, energy price increases are among the most important contributors to headline inflation (see graph below). Stripping out those prices, inflation is more subdued, with CPIF excluding energy rising 1.4 percent y-o-y (Riksbank 1.6; our estimate 1.4).
Usual for this time of year, noisy components affect inflation...
So what can explain the Riksbank's forecast error? It was not energy prices, instead it was something in CPIF excluding energy. Perhaps the Riksbank has picked up on some increases in fruit and vegetable prices on the back of drought conditions in Sweden (it scrapes such prices off the web)? Or had the Riksbank expected clothing and shoe prices to increase faster? Either way, the Riksbank's miss seems temporary, in our view. One indication is that core services prices were well behaved and our forecasts cross paths again in July (see chart).
...but underlying inflation AND energy prices are paving the way for a Riksbank rate hike in December
We stick with our forecast for a policy rate hike at the Riksbank's December meeting. Even if CPIF excluding energy rose moderately in June, several other indicators of underlying inflation look healthy. Additionally, because the energy price rise is now a trend, it will likely to result in second round effects that lift underlying inflation further going forward. Already, there are signs that energy prices are stoking inflation expectations, for instance in the July Prospera survey. The next interesting data point is the NIER sentiment survey, with firms' and consumers' inflation expectations (July 27).


No major surprises in our forecasts for the main aggregates 



Energy prices as important as services right now 





June inflation in line with our forecast, but a touch lower than the Riksbank's July report 




No spike in fruit and vegetable prices despite drought conditions in Sweden, leaving food prices decelerating in June 



Clothing and shoe prices fully in line with the "new" seasonal pattern of the last few years 



Short- and medium- term inflation expectations rising, on the back of higher actual inflation, among other factors.




And the longer-term mean of below two percent is caused by, not least, an outlier on the low side, while the median response is two percent


Source: Macrobond



Disclaimer

Johan Löf

Senior Economist

Sweden

jolo22@handelsbanken.se

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