The Consumer Price Index (CPI) rose by 0.5% in July. The 12-month rate was 2.2%. Price increases on package holidays contributed 0.3 percentage point to the change, while increased prices on international flights and electricity contributed 0.2 percentage points each. The underlying inflation rate (CPIF) rose from 1.9% in June to 2.4% in July, its highest level since December 2010.
The Swedish krona strengthened on the news while the stock market fell. The reaction is justifiable given that the inflation rate is over the 2.0% target set by the Riksbank, which could bring forward plans to raise the benchmark repo rate, argues DI.
But, even if the July data may lift the mood at the central bank, it is too early to celebrate. A number of temporary factors contributed to the increase, as did a new way of measuring inflation and tax hikes on electricity.
Speaking at a conference for online retailers on Thursday, Swedish Trade Federation (Svensk Handel) CEO Karin Johansson criticised both the Riksbank and the National Institute of Economic Research for bemoaning the fact that the retail trade is not helping push up inflation.
Johansson said that retailers are unable to raise prices, and have seen margins squeezed by online price comparison sites and frequent campaigns. She warned that the Riksbank’s negative interest rates were costing companies dearly, as import prices rise, and that many retailers will be forced to close their shops.
“Price pressure is here to stay and forecasters haven’t understood this,” she said
Statistics Sweden is to publish December’s inflation data on Thursday and experts are forecasting that inflation will reach its highest level in more than five years, which is bound to delight Sweden’s central bank, the Riksbank.
Swedbank, for instance, has forecast that the CPIF will rise to 1.8 per cent in November, while SEB has forecast 1.9 per cent. CPI is expected to be a fraction lower.
The bad news is that the expected increase is linked to the rise in oil prices rather than to enduring factors such as price increases on services.
Despite lowering the repo rate to -0.50%, the Riksbank has failed to bring up inflation to the two per cent target, which the bank’s leadership has been criticised for. The Riksbank now says that inflation targets could be made more flexible and a divergence of a percentage point up or down from the target could be allowed.
However Professor Lars Calmfors is critical. “This creates a greater uncertainty than what the Riksbank is aiming for. It is adapting to what has happened and increasing acceptance for divergence and there is no reason for that.”
However Annika Winsth, head economist at Nordea, welcomes the Riksbank’s thinking. “This has been eagerly awaited. We have long said that it would be better with a flexible view on inflation. They have fastened onto something that does not benefit Sweden.”
The Riksbank says its main priority is to bring inflation up towards the target of 2 percent and is therefore prepared to take action to safeguard confidence in the target.
In an address to the Swedish Confederation of Professional Associations on Friday, Kerstin af Jochnick, first deputy governor, said the negative repo rate and bond purchases had brought the level of interest rates down, which had contributed towards “good growth in Sweden”.
… but low inflation becoming entrenched
The Riksbank is running out of weaponry and low inflation is likely to become entrenched, warns Annika Alexius, a professor at Stockholm University’s Department of Economics, and one of the keenest critics of the central bank.
Alexius says the Riksbank would not be in this position, had it focused on inflation as early as 2012. She also warns that the Riksbank is likely to face huge losses in the wake of its bond purchases.
Professor Marvin Goodfriend from Carnegie Mellon University and Mervyn King, former government of the Bank of England, who reviewed the Riksbank’s performance 2010-2014, have suggested the Swedish central bank ought to be able to take longer than two years to reach the inflation target of 2 percent, as long as they give sufficient reason.
Mervyn King says that confidence is built on honesty, “There is no point pretending that the world has not changed. The Riksbank ought to be able to say ‘Right now we cannot achieve the target within two years without destabilising the economy’”.
They criticised the bank for overly optimistic forecasts, as well as for a mechanical trust that monetary policy and fine-tuning of interest rates would achieve inflation targets.
In practice, inflation is dead in Sweden, which means that the central bank, the Riksbank, should act more forcefully, Anders Borg, the former finance minister, has said in an interview with business weekly Affärsvärlden.
He warned that Europe faces a long period of stagnation; price pressure will remain low as a result of a weak banking system, rapid digitalisation and globalisation.
Borg also said that irrational currency movements were to be expected as a result of zero interest rates, and that this was “extremely dangerous for export-dependent countries such as Sweden”.