Denmark’s inflation drops in February, likely to decelerate further in short term on base effects

In February, Denmark's inflation increased 0.3% y/y, as compared with 0.6% in January and consensus expectation of 0.5%. Denmark's inflation in the shor term is likely to decelerate further as the base effects from declining oil prices will increase. Later in 2016, headline inflation is likely to accelerate again.

Rent on housing is the main reason for below expected inflation in February. It contributes 20.4% to the overall CPI-index. Rents on housing grew 1.7% in February, the lowest level since the time series started in 2010. The below expected increase in rents resulted in the contribution to drop to 0.35 percentage points, as compared with earlier 0.4 percentage points.

Meanwhile, the lower oil prices put a considerable downward pressure on inflation. This resulted in transportation to cut 0.28 percentage points from the overall inflation numbers. Meanwhile, miscellenous goods and services contributed positively (0.26 percentage points), particularly risen by higher financial services prices.

If the oil prices remain at the current level, headline inflation might decelerate further in the coming months as the base effects from energy prices will rise again. This temporary decline might decelerate headline inflation to around 0% in March and April. Base effects from energy are likely to fade away, accelerating the headline inflation to the core rate.

"Based on the assumption of a gradual increase in oil prices over the forecast horizon we expect Danish inflation to increase by an average of 0.4% in 2016, acceleration to 1.4% in 2017", says Nordea Bank.