Danish inflation likely to average 1.9 pct next year

Danish inflation in August was the lowest in any EU nation. At 0.8 percent against 2 percent, the difference between inflation in Denmark and the euro area was also close to record high, noted Danske Bank in a research report.

This difference is mainly due to random variation and something temporary. Out of the 1.2 percentage point difference between HICP in Denmark and the euro area, 0.5 percentage points are a result of food. Food prices fell 1.4 percent year-on-year in Denmark but up 2 percent in the euro area. The difference is broadly distributed among types of food. It is difficult to see any structural reason for this and food prices are likely to re-converge.

Communal heating is another major source of difference in inflation, which has a weight of 2.29 percent in the Danish HICP against the euro area’s 0.17 percent. Prices dropped sharply in Denmark, seemingly due to the heating firms’ solid performance last year leading to lower prices this year, as the sector is basically non-profit, said Danske Bank.

Increasing energy prices have been a significant factor in sending energy prices higher in the euro area; however, their weight is much smaller in Denmark. Therefore, lower inflation is often seen in Denmark than in the euro area in times of increasing energy prices.

Core inflation, gauged by HICP excluding food and energy is also lower in Denmark. In the last 20 years, Danish HICP inflation has on average been just 0.1 percentage points below the euro area. There is good reason to anticipate inflation rates to re-converge, as the business cycles are closely aligned and wage growth is similar.

“We call for 1.4 percent CPI inflation in Denmark for 2019 on average, which is the same as our call for euro area HICP. However, in the remaining months of 2018, the gap is likely to widen”, stated Danske Bank.