Norway’s inflation likely to have decelerated slightly in August

Inflation in Norway is expected to have decelerated a bit in August, but not enough to alter the gap to Norges Bank’s forecast significantly, said Nordea Bank in a research note. Inflation would then become another argument for the Norwegian central bank remaining on hold during the upcoming meeting. But even if inflation were to decelerate to the central bank’s forecast, stronger labor and housing market figures are sufficient to justify unchanged rates, noted Nordea Bank.

“We forecast core inflation at 3.4 percent down from 3.7 percent last month”, added Nordea Bank.

However, according to the central bank’s June monetary policy report, it expects inflation to reach 2.63 percent. The July figure was a huge surprise with inflation accelerating to 3.7 percent from 3 percent. The year-on-year growth was pulled up by 0.2 percentage points, while airfares pulled up the overall figure by 0.3 percentage points. These prices are expected to have fallen strongly from July August, according to Nordea Bank. However, a decline in these prices is consistent with the seasonal pattern and August 2015. Hence the year-on-year growth would not be that strong.

Both airfares and food prices are volatile and hence the strength of the correction is uncertain. The reduction in price in summer sale has been unusually small. This might signify slightly higher cuts now, added Nordea Bank.

“This CPI figure is the last before the coming MPC meeting. If we are right it means July was no outliner and inflation will remain ¾% point above Norges Bank’s forecast”, noted Nordea Bank.

The Norwegian central bank would adjust its forecast for inflation in the coming year, along with wage growth and inflation further ahead. Then a reduction in interest rate in September is quite unlikely.