Inflationary pressure rising in Sweden, fading in Norway

While inflation fell in both Sweden and Norway in January, the outlook for prices in these countries differs significantly. Consumer price inflation in Sweden fell from 1.7% to 1.4% in January. But a slowdown was always likely, due to base effects. We think that it will rebound in February to almost 2%. And with the latest economic surveys pointing to a sharp pick-up in GDP growth, inflationary pressure is likely to build. As a result, we expect the Riksbank to raise interest rates before the end of the year. By contrast, inflationary pressure in Norway is weak. The Norges Bank’s preferred measure of inflation slowed from 3.7% last July to just 2.1% in January. One percentage point (ppt) of this fall was due to a decline in imported goods inflation, as the effects of the krone’s previous depreciation faded. The remaining 0.6 ppt was due to declining domestic price pressures, as slack has opened up in the economy. We think that imported and domestic inflation will fall further, prompting the Norges Bank to cut interest rates later in the year.