Sweden’s CPI inflation likely to have accelerated in May

Sweden’s CPI inflation is likely to have accelerated slightly in May. According to the survey, total food prices are expected to have declined last month. Prices of ice cream and sweets were down in May, while those of vegetables and other foods are expected to have declined too. Food prices have grown in the past two years; however, food price inflation is expected to be more moderate in 2016, said Nordea Bank in a research report. Food accounts for a major share of consumer spending.

Meanwhile, recovery in global oil prices has fed through petrol stations. For the March through May period, the CPI was risen by rising fuel prices by a combined 0.3 percentage point. Furthermore, in recent weeks, prices continued to move upwards and are likely to push the CPI up in June as well. Moreover, prices of electricity have also risen slightly more than expected.

Footwear and clothing prices have also helped increase prices in recent years. But the prices are expected to level out. Currently, import prices are falling, which implies that clothing prices in shops are expected to moderate later in 2016. Prices are likely to have stagnated in May as compared to April, consistent with the seasonal pattern.

“We expect the CPI to have risen by 0.3 percent m/m in May. While our CPIF inflation forecast of 1.2 percent is fully in line with the Riksbank’s, our CPIF estimate ex energy of 1.5 percent is 0.1 percent point lower," noted Nordea Bank.

Hence, major deviations are unlikely for May and the major part of 2016. On the contrary, significant lower inflation is expected in the longer term.

The korna exchange rate is to large degree responsible for fluctuations in footwear, clothing and food prices. In all, goods and services prices that are susceptible to fluctuations in exchange rate, which contribute about 25% to the CPI, follow the same pattern after krona exchange rate fluctuations. The rate of price rises in these components has peaked and imported inflation is expected to decline as of now.

For Riksbank, cheaper imports are challenging. Indeed, domestic-related inflation is accelerating because of robust Swedish economy. However, wage growth is not enough to push up the headline inflation rate to the target rate of 2%. This suggests that the Swedish central bank will concentrate on the krona exchange rate and import prices. This is because it cannot rely much on higher domestic inflation.

Arguments favouring the central bank adopting a stance of wait and watch include the strong Swedish economy and uncertainties regarding the remaining monetary policy tools’ efficiency. The probability of the ECB undertaking an action has reduced due to increasing oil prices and rising hopes of higher inflation in the autumn. Hence, further stimulus measures are not expected from the Riksbank. The first hike in interest rate is quite far away.