Denmark: Inflation ticks up, much more to come

Inflation was slightly higher than expected in October but not in a way that significantly changes the outlook. It looks like August was the low point for inflation and that it is going up from here as several negative price effects fade away.

Danish CPI inflation was 0.7% y/y in October, up from 0.5% in September. An increase was expected, due to a base effect from low price increases in October last year. The reading was a bit higher than our forecast of 0.6%, though. There was a rather strange jump in the price of recreational services of 10.8% m/m, adding 0.1 percentage point to overall inflation. Fuel prices did not fall as much as had been suggested by list prices from petrol stations. On the other hand, food prices declined more than expected, subtracting 0.1 percentage points from headline inflation. We had warned in advance that there might be a large effect from the price of financial services, but in the event, they only increased by 1.8% m/m, which is not enough to significantly impact CPI.

Today’s reading does not change the overall outlook. We think that August was the low point for y/y inflation and that it is going to go up from here, approaching 2% next summer before declining a little again.

Inflation has been dragged down this year by the scrapping of the fat tax from new year and lower drinks taxes from July. There has also been a large effect from lower energy prices, small price increases for food and from a mysterious fall in the price of transport insurance, which alone is detracting 0.3 percentage points from CPI inflation in 2013. All of these effects will fade away, save possibly that energy prices could go a bit lower yet in 2014 and another but smaller cut in drinks taxes from January. That should bring inflation back to a more normal level. Wage growth is running at close to 1.5% y/y and might well increase a little in 2014, as the labour market outlook is improving. Over the summer we even expect to see y/y inflation rates approaching 2% because of the base effect from low price increases this summer.

However, it is always important to remember that Danish inflation numbers tend to be both volatile and unpredictable. The significant impact from transport insurance and recreational services are examples of some of the effects that sometimes show up in the price samples and alter the figures a lot.