Scandi inflation: Divergences continue

Jonas Goltermann, Developed Market Economist at ING, suggests that a major upside surprise in Norwegian inflation, while Swedish underlying inflation remains soft, suggesting that the monetary policy divergence between Norges Bank and the Riksbank will increase over the autumn

Key Quotes

“Norway: energy and food boosts inflation

Headline inflation for July jumped to 3.0% (vs 2.6% in June, and consensus expectations of 2.6%), while core inflation also picked up to 1.4% (from 1.1% in June, and higher than expectations of 1.2%). This upside surprise was mainly down to higher energy and food prices.”

“Sweden: headline strong but core still soft

Headline CPIF inflation remained at 2.2% in July, in line with expectations. Core inflation fell to 1.3% (from 1.4% in June) and services price inflation, a key measure for the Riksbank, fell even further to 1.2% (from 1.5% in June).”

Core inflation has come in weaker than the Riksbank’s forecast six months out of seven this year, which suggests yet another downward revision could be on the way at the Riksbank’s September meeting.”

“Policy implications

Today’s data reinforces our view that monetary policy is likely to diverge in Scandinavia. Norwegian inflation looks to be on a slow but steady upward path, and Norges Bank is set to hike rates to 0.75% in September. This will likely be reiterated a the interim policy meeting next week. If the economy remains on track, we expect another hike in Q1 next year.

The Riksbank, on the other hand, will see today’s inflation figures as a disappointment, and the dovish majority on the policy committee is likely to become even more cautious.”

“While the current risk environment means that high-beta currencies like NOK and SEK struggle against the euro and dollar, we continue to see NOK as the better bet.”

“We see NOK/SEK as likely to keep heading higher and look for the pair to eventually break through the 1.10 level as the divergence in the path of core inflation, and consequently in central bank policy is confirmed over the autumn.”

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