Swedish inflation rose sharply, as expected, in January and is set rise above the Riksbank’s 2% target in Q2. In any case, policymakers have signalled that they will look through any temporary breach of the target, and a prolonged period of policy stasis is on the cards.
Rising above target, but only temporarily
- Swedish inflation rose sharply, as expected, in January and is set rise above the Riksbank’s 2% target in Q2. In any case, policymakers have signalled that they will look through any temporary breach of the target, and a prolonged period of policy stasis is on the cards.
- The jump in CPIF inflation in January, from 0.5% in December to 1.7%, was in line with our above-consensus forecast. As expected, energy prices boosted the rate, which mainly reflects the comparison with the period of very low electricity prices last year. Such base effects will continue to put upward pressure on the headline rate over the coming months and will temporarily push it above the Riksbank’s 2% target.
- That said, the pick-up in energy prices was not the full story, and the rise in CPIF excluding energy, from 1.2% in December to a 14-month high of 1.8%, was stronger than we had pencilled in (1.4%) and a touch above consensus (1.7%). (See Table 1.) Similar to the case in Germany, some of the drivers may prove temporary; indeed, clothing inflation was boosted by “weaker January sales” than normal – an effect that may be reversed as soon as the February data. Moreover, changes to the CPI weights boosted inflation by 0.2%-pts. However, food and housing inflation also rose, and domestic price pressures may start to pick up as and when restrictions are eased.
- The bigger picture is that the Riksbank has indicated that it will look through a period of above-target inflation and its current projection of the repo rate staying on hold at zero into 2024 looks about right to us. Data released yesterday showed that the five-year money market participants’ measure of inflation expectations, which the Riksbank keeps a close eye on, was stable at 1.8%, and resource utilisation is still very low. (See Chart 1.) That said, given that the core rate was stronger than we expected, we now think the Bank is unlikely to increase the size of the asset purchase envelope anytime soon.
Chart 1: Sweden Core Inflation & Resource Utilisation
Table 1: Sweden Consumer Prices
CPIF exc. Energy
Melanie Debono, Europe Economist, firstname.lastname@example.org