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Fast Comment SwedenExpect CPI report to show encouraging signs for the Riksbank, but the tide is about to turn - preview of July inflation

  1. Inflation to ease slightly, but remain above Riksbank forecast, for now
  2. With the cooling Swedish economy, even late-cyclical inflation indicators are now starting to roll over, dampening 2020 outlook
  3. This turning tide is central to our view that the Riksbank eventually cancels all planned rate rises


The economic boom is cooling, with GDP growth slowing and the labour market appearing to make an early turn for the worse, but inflation is chugging along in Sweden, perhaps unsurprisingly as inflation tends to be late-cyclical. In our view, the current near-term outlook is even a touch higher than the Riksbank's forecast.


However, much of the more optimistic CPIF outlook follows from a pickup in the electricity price, and this could well be temporary even if hydro power has experienced a persistent lack of supply in 2018-19.



More broadly, inflation will continue to be supported by the overall cost pressure in the economy for some time yet...



...but many other important leading indicators for underlying inflation have peaked. The tide appears to be turning, meaning inflation will likely slow during 2020. However, note that we see some further acceleration in the near term before inflation rolls over like the indicators have, here illustrated by our nowcast for CPIF excluding energy. 


CPI July details: Inflation expected to ease slightly, but remain above Riksbank forecast. For consensus estimates, keep an eye out for our weekly economic calendar due on Friday. The CPI July report is due on Wednesday, August 14.



CPI July details: For the second year in a row, dental care prices have affected the July inflation print noticeably. This year it is due to a change in how Statistics Sweden distributes the effect of subsidies between months, dragging down overall July inflation by about 0.1 p.p. (but correspondingly lifting coming months incrementally). Last year, the government increased the level of subsidies in July, causing a de facto fall in the cost of living and hence the dental care CPI component.



CPI July details: Changes to the seasonal pattern of clothing and shoe summer sales suggest inflation will turn out higher than standard time series forecasting models signal. Recently, sales have started earlier in June, meaning the additional price fall in July has been more limited (see below). This new pattern adds 0.1 p.p to our CPIFXE inflation estimate, compared to the main tendency of models that point to 1.7 percent CPIFXE inflation. Another uncertain component that may yield noise in the inflation print is package tours, where the statistics bureau has tweaked the method again this year.



Disclaimer

Johan Löf

Senior Economist

Sweden

jolo22@handelsbanken.se

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