Norway inflation has surprised us on the downside so far this year. As expected last year's NOK weakness has lifted imported inflation, but with a drop in domestic inflation from close to 3% at year-end to 2% in April overall core inflation has fallen. In April core inflation was down to 2,1%.
In the somewhat longer run lower capacity utilization and wage growth argues for lower domestic inflation. However, the drop last month is mainly due to temporary factors. Nordea Research therefore forecast overall core inflation to increase from 2.1% to 2.5% in May. That is well above consensus at 2.3%. Norges Bank's forecast is on the other hand 2.6%.
In April core inflation was 0.3 points below Norges Bank's forecast. If consensus is right the gap will remain and running inflation will have a downward effect on the coming rate path. Norges Bank will conclude that running inflation is close to forecast.
"Running inflation is not our argument for a rate cut in June. Clear signals of a cut combined with lower than expected wage growth is our main argument. We would be very surprise if we see no cut in June despite the current weak NOK." says Nordea Research
