January inflation in Sweden
January inflation
The outcome largely confirmed the flash estimate with CPI at 0.5%, CPIF at 2.0% and CPIF excluding energy (core) at 1.72% y/y (revised up from 1.66% y/y). The downside surprise in inflation is lower service inflation; especially dental services declined more than expected due to changes in subsidies. Electricity prices, which were low in December but high in January, rose by 21% in CPI terms and contributed to the higher headline inflation. Education has received a higher weight, while furniture and clothes have a lower weight.
Looking ahead, we anticipate further downward pressure from the SEK. However, as we do not foresee additional strengthening of the SEK, the pass-through effect should diminish over the course of the year. Electricity prices remain elevated, and although the cold weather appears to be easing slightly, production remains under strain. We will revise our forecast and send out an update in the coming days.
The Riksbank
The markets have recalibrated their expectations of the Riksbank in recent weeks due to the slowdown in macro data at year-end and the downside surprise in inflation in January. From a macro perspective, we do not see a need to ease monetary policy. The slowdown was expected and factored into our forecast in December. The labour market is still improving, not least seen in the strong unemployment reading earlier this week at 8%. From a stimulus perspective, we do not see the need for another cut. The recovery is ongoing, inflation is on target, and we are waiting for additional fiscal stimulus.
Regarding the low-inflation environment before the pandemic, the Riksbank have been clear that they do not wish to return to unconventional monetary policy, emphasising that fiscal policy should take greater responsibility in situations where inflation is too low. One additional cut is not unconventional, but it would bring the interest rate to the lowest territory of the neutral span. The effect of fiscal policy on Swedish inflation is debated, but uncertainty surrounding the stimulus package and underlying price pressures remains high. The cost of waiting to see how these factors develop is low.
Author
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.
