Denmark: Inflation hit by perfect storm – set to decline again

Danish inflation took a huge jump in July, from 0.6 to 1.5% y/y. We had expected an increase to 0.8% because of the base effect in mobile phone services and fuel, so this took us by surprise.

Almost all the major components surprised to the upside this time, creating a ‘perfect storm' where all volatility points in the same direction. We expect most of this to reverse in the coming months, taking inflation back down to the level of around 1.2% for the rest of the year.

Food prices were up 1.7% m/m and 3.8% y/y, which is out of line with what we see in the rest of Europe. Packaged holidays were another major contributor. The weather was bad in July, but that is not the reason, as packaged holiday prices in Denmark are collected half a year in advance – we confirmed today with Statistics Denmark that that is still the methodology. In any event, this component should also reverse. Holiday home rental prices seem to be boosted by demand and might not fully reverse. The parts of inflation related to energy prices are not likely to drop much as their increase is mostly a base effect.

There is not much indication that underlying inflation pressure is increasing in Denmark. Wage growth in Q1 was just 0.2% q/q, a record low. The trade-weighted DKK has strengthened 2.7% year to date. We expect inflation to come down again, apart from the increase caused by base effects.

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