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Danish April inflation surprised markets, remaining flat at 0.0 pct, same as in March but well below expectations of a pick up to 0.2 pct. Expectations of food prices to decline around Easter and then soar post that amid depressed clothes’ prices, kept calculations on the upside.
Clothes’ prices gained only slightly at -3.9 pct with women’s and children’s clothes down by 8 pct and 7.1 pct respectively on intensified competition from retailers. In addition, the government is likely to scrap the PSO tax on electricity this year and partly replace it by higher income tax, increasing chances to lower electricity prices by around 10 pct and overall inflation by 0.2 pips throughout 2017. Although there is no decision yet but comments from other parties suggest it is a likely outcome.
"We have lowered our outlook for clothes’ prices so there is only a partial rebound. We now forecast 0.0% y/y for May CPI, after which the inflation rate will start to increase gradually
driven by base effects, reaching 1% y/y towards the end of the year. That gives us an average
rate of 0.4% for all of 2016, which would be the lowest since 1953. For 2017, the scrapped
PSO tax lowers the inflation outlook to 1.4% for the whole year," said Danske Bank in a recent report.
Drop in Danish inflation is driven almost exclusively by goods’ prices. Service price inflation and wage growth show that domestic inflation pressure is not dead but some of the decline in goods’ prices could be the result of increased competition in retail sector, particularly from foreign online retailers.
"The current wage growth is regulated by collective agreements made in 2014, which will be renegotiated next year. This has helped to underpin consumption growth but high real wage growth is also hurting profits, as it is not supported by high productivity growth, quite the contrary. However, the proposed tax change for 2017 will supposedly not affect purchasing power much and should also lower costs for businesses," Danske Bank said in a research piece.
