Norwegian core inflation likely to bottom out slightly over 1 pct in July and reach 1.8 pct in December

The Norwegian inflation has slowed further than was anticipated earlier. Following a strong disinflation since summer 2016, there have been a degree of stabilization in core inflation in the past two months. Most of the drop in inflation is because of the NOK strengthening significantly in the course of last year, resulting in prices for imported goods rising less rapidly in this year. At the same time, inflation has been pulled down by considerable base effects, having climbed solidly in the first half of 2016 because of the NOK’s depreciation in 2015 pushing up prices for imported goods.

There has also been pressure on food prices and airfares in the initial few months of this year. These base effects would in isolation, pull down the annual rise in consumer prices through to July, stated Danske Bank In the autumn, they are expected to gradually push up inflation.

The NOK’s depreciation since February is also expected to gradually start pushing up import prices in the autumn. Moreover, it appears that both food prices and airfares have been weighing on inflation so far in 2017. The supermarkets and airlines are seen struggling to keep profitability, but the negative contributions from these product groups are expected to wane gradually and possibly even reverse slightly in the course of 2017.

“Therefore, we expect core inflation to bottom out at just over 1 percent in July before gradually moving up towards the target during the rest of the year, hitting 1.8 percent y/y in December”, added Danske Bank.

Base effects indicate that inflation will likely rise further in the first half of next year before stabilizing towards the end of the year.

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