Sweden’s inflation likely accelerated in March

Sweden’s inflation in February, gauged by the CPIF ex energy, had reached 1.5%. With very low inflation rate for March 2015 and some temporary effects, the y/y inflation figure for March 2016 is expected to rise to 1.8%, according to Nordea Bank.

“Risks to our forecast are mainly to the upside. As a result, CPIF ex energy rate may have been close to 2% y/y. We expect the CPI and the CPIF readings for March to be 0.8% y/y and 1.5% y/y, respectively”, added Nordea Bank.

However, it is positive news for the central bank. The worrying issues of zero inflation have alleviated and the CPI-inflation is likely to have accelerated further as drop in mortgage rates has stopped. However, the rebound in CPIF ex energy is for a brief period of time. The CPIF inflation, including and excluding energy is expected to remain around 1.5% for most of 2016, noted Nordea Bank.

The inflation composition is “right”, with domestic and services inflation driving the overall inflation. Moreover, Sweden’s economic growth has been above expectations. Riksbank Executive Board members Flodén and Ohlsson, in February had mentioned reservations against lowering rate. Certain factors imply that the central bank will avoid implementing additional measures.

However, quick appreciation of the Swedish krona continues to be a risk and possible driver of deflationary impulses particularly since the ECB might undertake additional measures, noted Nordea Bank. The current pay talks underpin the view of moderate cost pressures. Manufacturing industry set the benchmark at 2.2%. Other sectors are expected to follow the benchmark.

“We therefore stick to our view that the Riksbank will extend its bond purchase programme in H2 2016”, says Nordea Bank.

International flight prices are the main risks on the upside to the forecast as they tend to increase during holiday periods, noted Nordea Bank. Easter was relatively early in 2016 and hence prices are expected to have increased in March.  International flight prices are expected to decrease in April.

Meanwhile, recovery in food prices are likely to have continued, while prices of footwear and clothing increased, consistent with seasonal patterns for March, noted Nordea Bank. Energy prices on the other hand continued with the roller coaster ride. Energy prices declined sharply in February and recovered in March and are marginally higher than central bank’s estimate.