Denmark: Modest inflation pickup and choppy waters ahead

• Core inflation has remained stable due to imputed prices and tobacco.

• New consumption pattern and return of tourism will increase volatility.

• We expect inflation to increase from 0.4% this year to 0.8% and 1.3% in 2021 and 2022 respectively.

Imputed prices soften crisis blow to inflation

Danish CPI inflation hit zero in the spring almost entirely driven by falling oil prices. Core inflation has drifted stably around 1% since February as opposed to eurozone core inflation. That said, COVID-19 has had a significantly negative impact on some prices. In particular, we have seen price declines in hotels and household equipment. Some of the obvious effects are not registered because prices are imputed, on for example package holidays, international air fares, concerts etc. The price declines have been countered by increasing tobacco prices in the wake of the tax increase in April and thus NPI inflation (which excludes taxes) stands at just 0.2% in October.

Key questions for Danish inflation going forward relate to rents, the impact from higher tobacco taxes and the timing of a vaccine and the following impact on air fares, package holidays, hotels, etc. Besides, we could be heading for choppy waters over the coming years as big changes in our consumption pattern will impact CPI weights going forward.

Rent increases will remain low

Looking at rent increases, which weighs 21% of total CPI, they have declined from above 2% in 2013 to 0.9% in the last two years. We know that rents in the regulated part of the private rental market are capped by inflation itself, so low inflation is self-reinforcing here. In the social housing sector, where rents are set according to costs, the low level of interest rates is helping to keep rents subdued. Hence, there is nothing really to indicate that upcoming rent increases should be much higher than has been the case in recent years. We expect an unchanged rent increase of 0.9% in February 2021 but a slightly higher increase in 2022 as inflation has increased in the meantime.

Tobacco gives steady push higher

Since the tobacco tax was increased in April, such that a 20-pack cigarettes increases from approximately DKK41 to DKK55, prices have climbed 24% and there is another 8% to go before the full impact is reached. Stock piling of cigarettes and old tax stamps are the key reasons for the delayed impact. Tobacco consists of three subcategories in the CPI; cigarettes, cigars and ‘other tobacco goods' with weights of 1.30%, 0.01% and 0.26%, respectively. Cigarette prices only have another 5% to go before full impact from the tax increase but the pace has decreased almost to a standstill. Cigar prices still have not increased much, but make up a negligible share of tobacco. The price of ‘other tobacco goods', which is made up of 90% pipe tobacco, has only increased 8% so far. We expect this slow but steady trend of both to continue. In January 2022, the price of a 20-pack cigarettes is increased to DKK60 and we expect the price impact to be much quicker.

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