Denmark’s inflation likely to accelerate in 2017

Denmark’s inflation is still lingering near the historical lows. In February, the country’s inflation rate reached 0.3%. The low rate of inflation is mainly due to decline in energy prices. However, goods prices are generally rising very gradually. On the contrary, service industries’ prices are still rising by almost 2% per year, higher than wage growth. This suggests that low inflation is mainly because of external sources, according to Danske Bank.

Prices in euro area dropped 0.2% up to February, according to the EU harmonized HICP method. Meanwhile, in Denmark prices rose 0.1%. Nevertheless, inflation is expected to be higher by late 2016 and into 2017, unless energy prices decline again, added Danske Bank. Hence, inflation in Demark is likely to accelerate in 2017. Although additional expensive commodities and wage growth in Denmark are likely to slightly add to inflationary pressures, according to Danske Bank.

Statistics Denmark’s wage index showed that the country’s wage growth has hardly accelerated in spite of growing employment. On the contrary, Confederation of Danish Employers’ (DA) wage statistics indicate that wages are accelerating with growth at over 2% per year. It is not clear why there is disparity between the two statistics.

However, if DA’s figures are correct, the country has a real wage growth of nearly 2%, which is quite high. With this wage growth, consumption growth is also expected to grow strongly, but this raises concerns regarding competitiveness. According to Danske Bank, such high wage growth is not sustainable in the country given its very low productivity growth.