Danish headline inflation likely to rise in years ahead on higher price of cigarettes
Danish inflation is likely to rise on higher price of cigarettes. Denmark’s minority government reached a budget agreement on Monday with a parliamentary majority. The price of a pack of cigarettes will rise approximately DKK41 to DKK55 from 1 April 2020 and to DKK60 in 2022. This would be three times as big a price rise as in the government’s budget proposal from October.
Other fees have also been risen, for example on plastic bags and disposable cutlery. For these the effect of inflation is not significant. Unlike euro inflation linked bonds, the Danish ones are attributed to the CPI index including tobacco and thus a hike in tobacco fee leads to a price rise in Denmark’s inflation linked bonds, noted Danske Bank in a research report.
The number of smokers have dropped considerably in recent years and the CPI-weight of tobacco has dropped accordingly. Still, a rise of 50 percent, which is greatly what it would be by 2020, amounts to nearly 0.8 percentage points on headline inflation, more than double the effect seen in 2010 when the price of a 20-pack of cigarettes was increased by DKK2-3.
The price rise is not expected to take effect already on 1 April, as cigarettes have a tax stamp, which determines the price. If convenient stores and kiosks build stocks, ‘cheap’ cigarettes might possibly be sold for some time after 1 April.
“We expect a gradual implementation during Q2 20 and thus adjust our forecast for inflation in 2020 from 1.2 to 1.3%. The effect from the tobacco fee is almost 0.4%-points. In 2021, this will increase inflation by 0.2%-points with the assumption of unchanged weights”, added Danske Bank.