Denmark: Inflation much lower than expected

• Inflation was only 0.5% y/y in February, driven down by clothes, rents and a base effect in fuel prices.

• We still think that February was the low point of y/y inflation for 2014, but we now expect the rate for the remainder of the year to be just 1.0%.

Danish CPI inflation surprised on the downside in February at 0.5% y/y, versus 1.0% in January and an expectation of 0.8%. The main reason for the surprise was a lower-thannormal increase in the price of clothes and shoes, which usually rebounds strongly in February after the January sale, but this time only increased by 2.4%. Clothes and shoes alone can explain 0.2 percentage points of the decline in the y/y inflation rate. Food prices also surprised on the downside once again, as did the volatile price of packaged holidays. The annual update on housing rents also came out lower than usual at a 1.9% increase, versus 2.2% a year ago. As rents make up 20.1% of the CPI, this has a significant effect, in itself dragging the y/y rate by 0.1 percentage points. As rents are only updated in February, this effect will remain in the y/y inflation rate for the rest of 2014.

With the January and February figures in place, we now have a fairly clear view of many of the effects that will dominate y/y inflation for all of 2014. Our previous 1.3% forecast for the whole year now looks too high and a more realistic estimate is 1.0%. We still think that February will have the year’s lowest y/y inflation rate. This is mainly because of the profile of fuel prices in 2013, which had a strong spike in February. Based on our expectation of a fairly stable oil price measured in DKK, that will lead to higher y/y rates for gasoline, peaking in June, when we now expect CPI to increase at 1.4% y/y before the rate start to decline again as the base effect turns in the other direction.

At these levels of inflation, there is of course a risk of outright y/y deflation, especially if fuel and/or food prices decline further. However, we still see that risk as very limited. Domestic inflation pressures remain in place. Wage growth is currently running at 1.2% y/y in the private sector and this growth rate can be expected to increase modestly during 2014 based on the recent collective bargaining agreements. Inflation in services is at 1.8% y/y in the February numbers, as opposed to the -0.8% rate for goods.