Swedish inflation jumps to 5-year high

Well, the Riksbank did warn that it doesn’t have a great record for predicting things…

Inflation in Sweden jumped to its highest level since February 2012 in April, according to new data released just days after the central bank said it would take longer than it expected to recover towards its target.

Consumer prices rose 1.9 per cent in the year to April, a significant increase from last month’s figure of 1.3 per cent, and above the 1.7 per cent forecast by economists.

Prices increased by 0.6 per cent over the month, thanks to increases in the prices of flights, books and banking services.

Importantly from the Riksbank’s perspective, core inflation, which strips out the impact of volatile energy prices, also jumped 0.6 per cent over the month, with the year on year figure increasing from 1 per cent to 1.6 per cent.

Sweden’s economy is growing at a rapid pace, but the Riksbank has remained dovish in recent months as its mandate is focused on keeping inflation around a target level of 2 per cent.

However, Nordea Markets’ Andreas Wallström warned about getting too carried away about the potential impact of the recent increase, saying:

Although today’s outcome provides some short-term relief for the Riksbank, there are challenges longer out. Inflation is currently close to the target due to higher energy prices and previous krona weakening. These factors are expected to fade and we forecast inflation to stabilise around 1.5 per cent in 2018.

The krona’s sharp depreciation late last year helped to boost inflation by increasing the price of imports, and the Riksbank is wary of reversing this effect by tightening monetary policy too soon. The minutes of its latest policy meeting, released yesterday, showed the executive board was worried that the krona would quickly strengthen if it began to raise rates before the European Central Bank.

Separate data also released this morning highlighted one of the side-effects of the Riksbank’s dovishness, however, as the country’s record low interest rates encourage rapid growth in house prices and household debt. The latest figures showed average house prices across the country rose 9 per cent in the year to April, including a 2 per cent increase in the last three months.