So now we have the latest inflation data (February) and Prospera inflation survey data. CPIF inflation, which is the policy guiding measure, came in at 0.86% y/y versus a Riksbank forecast of 0.74% y/y. We do not think the Riksbank minds that level really. So where does this leave us? In fact, we think that (at least) four factors need to be considered in order to assess the outlook for Riksbank policy going forward.
First: As repeatedly mentioned by the Riksbank, inflation seems to have troughed and is on the move upwards. Nothing really in the latest data contradicts that. Looking at a more detailed level, recent trends show that a) services price inflation is rising (now at 1.5% y/y) while b) goods price inflation is relatively steady around zero, c) inflation on domestic goods and services is picking up, currently at 1.2% y/y while inflation on imported goods and services remains pretty flat, slightly below zero. To conclude, higher overall inflation is primarily driven by domestic services. That is fine and should offer the Riksbank some relief, at least here and now.
Secondly: Inflation expectations in the March Prospera survey do not offer any relief. Sure things would have been worse if all expectations had continued down. However, mean expectations remain more or less unchanged at 1.7% and 1.1% over 5 and 2 years respectively. The RB has clearly underlined that the 5-year survey result in December was worrying, so it is hard to see the new survey result as less of a worry. But do not forget wage expectations. In this case we would guess that 2-year expectations among unions and employers are the most critical (but 5-year expectations have some relevance too). Both respondents dropped further and are well below the levels when the current wage deals were met. This is certainly not to the liking of the Riksbank considering the risk of new deals coming in at levels inconsistent with the 2% inflation target.
Third: The krona. The so called KIX-index isn’t very far (yet) from the Riksbank forecast. But in our view it is EUR/SEK that is the issue here. Since 12 February the EUR/SEK has gone from 9.69 to 9.10. Now the thing is that each piece of information that could speak against further Riksbank policy action sends EUR/SEK south (the CPI data moved it 5 öre). And the lower EUR/SEK gets the higher the ‘risk’ that the recent rise in inflation eventually stops. So in our minds further downside in EUR/SEK is a factor that could force the Riksbank to act despite higher spot inflation.
Fourth: The ECB’s QE programme has admittedly been going for only three days, but European yields have undoubtedly responded, with, for instance, German 10s at new record lows. Even though it is too soon to make a final judgement on the full effect, we are pretty sure this is something on which the Riksbank will keep a close eye.
Conclusion: Weighing these four factors, our assessment is that the risk remains tilted towards more RB action (some further room for a rate cut but in combination with expanded bond purchases). We agree that recent inflation data are moving in the Riksbank’s way, but points 2-4 remain a potential threat for the rise in inflation coming to an end.
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