Norwegian core inflation accelerates above expectations in July

Norwegian core inflation accelerated in the month of July to 3.5 percent year-on-year from June’s 3.1 percent. The outcome was above consensus expectations of 3.1 percent. Clothing price dropped 1.8 percent sequentially in July 2020 as compared with a fall of 5.5 percent seen in July of 2019. This might be due to increased domestic demand. The price index for hotels and restaurants rose 0.6 percent sequentially in July, versus -0.3 percent year-on-year.

Imported inflation accelerated further. The price growth for imported goods rose to 3.8 percent year-on-year in July, accelerating from 3.3 percent in June. The price growth for domestically produced goods and services remained the same at 3.2 percent year-on-year. Prices on domestic services excluding rents rose to 4.9 percent in July from 4.5 percent in June.

The headline consumer price inflation eased a bit to 1.3 percent year-on-year in July from June’s print of 1.4 percent. Norges Bank’s forecast was 1.4 percent. Electricity prices dropped 35.1 percent in July.

Core inflation continues to rise, mainly driven by the dramatic depreciation of the NOK earlier in 2020.

“In the absence of new rounds of substantial NOK depreciation, however, the effect on inflation will be temporary. Today’s data also showed visible rises in some domestic prices that may be related to strong rise in domestic demand. On the margin today’s inflation figures, supported by strong house market data, may indicate a rate hike sooner than later. But as long as the rising inflation is assessed as temporary and a risk that deflationary effects related to lower wage growth may show up later, we do not expect Norges Bank to start preparing for an early rate hike solely based on today’s numbers”, said DNB Markets in a research report.