Norway’s core inflation likely to peak around current levels in summer

Norway’s core inflation accelerated surprisingly in February mainly due to high food prices. The annual rate of inflation was higher than Norges Bank at 3.4%. The main driver for high inflation rate was prices of imported goods that continued to increase quickly. But Norway’s inflation is not giving any indication of decelerating either and reached 3% y/y in February. The rapid pass-through from exchange rates to prices might be down to several factors, according to Danske Bank.

Firstly, the Norwegian krona has been depreciating for two years. Importers and exporters do not expect this to be for a brief period of time and quickly rebound as witnessed in the past. Moreover, in the recent years, retail trade margins have come under pressure.

This might be because of high import content in the goods made in Norway or just because it is easier to increase margins by raising prices when prices of imports are increasing quickly, according to Danske Bank.

Underlying price drivers such as higher productivity growth and lower wage growth, are likely to dampen domestic inflation, added Danske Bank. Hence core inflation is likely to peak around current levels in the summer and then slowly decelerate as exchange rate effects wane and ultimately reverse.