Swedish headline inflation accelerates below central bank’s projection in June

Swedish CPIF inflation accelerated in the month of June. It rose to 2.23 percent from May’s 2.06 percent. It is below the central bank’s projection of 2.37 percent. The CPIF inflation reading also came in slightly below consensus expectations of a 2.3 percent print. Core inflation, which excludes energy, came in at 1.36 percent, also below the Riksbank’s expectations of 1.56 percent. However, it was consistent with consensus expectations of 1.4 percent.

Looking into details, the main surprises were food and home electronics’ prices. Furthermore, prices for domestic services came in below projections. Most measures of underlying inflation were probably low in July. The sharp slowdown in services inflation is also noteworthy. Underlying inflation and services inflation continue to be problematically low for the central bank. CPIF excluding energy coming in below the central bank’s projection by 0.2 percentage points would not be well-received by e.g. Deputy Governor Jansson.

However, the softness in core inflation might be partially countered by what appears to be a recent switch by the central bank to talk more about headline inflation than about core inflation, from the market’s point of view. Headline inflation is expected to stay above target in quarters ahead, especially as electricity prices have continued to rise markedly in recent weeks. Overall, the disappointment in core inflation does not underpin the idea of a Riksbank hiking rate later in 2018.

“Our forecast is that the Riksbank will not hike rates until 2019. To get a liftoff of the repo rate later this year the Riksbank must have changed its reaction function towards headline”, noted Nordea Bank in a research report.