Cut in electricity taxes could weigh on inflation for years

The government is likely to propose a large cut in electricity taxes going into negotiations on a new energy settlement this spring.
The implications could be significant and pull Danish CPI inflation down for years to come.
We stick to our forecast of 0.6 percent this year and 1.3 percent in 2019 for now but risks are skewed to the downside.

Danske Research Team Danske Bank A/S

The outlook for a pickup in Danish inflation has deteriorated significantly in recent months as inflation has fallen sharply from 1.6 percent in September to 0.5 percent in March. Now, the probability that inflation will remain below one percent going into next year has increased. The reason is the upcoming energy settlement, which could end up with a large electricity tax cut.

Danish electricity taxes are the highest in Europe, currently making up about 40 percent of the total electricity price, which should be seen in relation to 0-20 percent in other EU countries. In addition, the taxation of electricity is significantly higher than on alternative heat sources such as natural gas and fuel, which makes it less attractive to change an existing oil burner for a more climate friendly heat pump running on electricity. That makes it politically attractive to cut electricity taxes in order to meet future energy political targets.

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Danske Research Team

Danske Bank A/S

Research is part of Danske Bank Markets and operate as Danske Bank's research department. The department monitors financial markets and economic trends of relevance to Danske Bank Markets and its clients.

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