Swedish Inflation Is Stubborn…and no longer falling

Inflation in Sweden rose by 0.6% in November after rising by 0.7% in October and gaining 0.2% in September. HICP inflation is on another strong streak in Sweden. But, year-over-year Swedish inflation is up by only 2%. There is a parallax view of price pressure from the domestic inflation gauge where the monthly gains are only about half the gains of the HICP monthly, and where year-on-year inflation is up by only 1.5%, slips to a 0.4% pace over 6-months then accelerates sharpy to a 3% pace over 3-months – quite different from the HICP pattern and inflation levels. Both domestic and HICP inflation are well behaved over 12-months and while these readings differ a lot after that (over 3-Mo and 6-Mo) they both show inflation accelerating over 3-months compared to its 12-month pace. In neither case is inflation still falling.

In November inflation accelerated for food and non-alcoholic drinks, for health and medical care, for recreation, and for other goods and services. Inflation accelerated in 55.6% of the categories, the same as in October down slightly from 66.7% of the categories with accelerating inflation in September.

The readings in the pattern for domestic inflation are clear and muted. But HICP inflation in Sweden may be becoming a problem as it stops falling too soon. It may be becoming a bigger problem as sequential inflation rates for 12-months, six-months, and three-months show a steady increase in inflation although that is not accompanied by a steady rise in diffusion.

Diffusion is derived from the domestic index Over 12-months inflation is decelerating in all categories compared to 12-months ago. This is the sense of progress that Sweden has made on past high inflation. But over six-months compared to 12-months inflation is accelerating in 55.6% of the categories. That occurs with the overall domestic inflation rate rising by to only 0.4% at an annual rate from its 1.5% pace over 12-months; given the decline in the pace of inflation the increase in diffusion is surprising. Over three months the diffusion rating decelerates logging a reading of 33.3%, down from 55.6% over 6-months. The diffusion calculation compares 3-month inflation to the six-month inflation rate across categories. The headline domestic pace, of course, accelerated to 3.0% over 3-months from 0.4% over 6-months – still, diffusion narrowed. Inflation and diffusion are out of step.

Two inflation measures, quite different inflation What we see here is a substantial difference between the national CPI and inflation as measured according to the HICP. The national CPI shows 12-month inflation at 1.5% dropping down to 0.4% at an annual rate over six months and then re-accelerating the 3% over 3-months, while the HICP shows a steady acceleration in Swedish inflation. The national index shows the step down from 12-months to six-months and then a significant step up over three months, although the step up is to a pace that's only half of the pace that's measured by the HICP. Even so, there is a step up in inflation over 3-months the same as for the HICP. According to the national CPI, there's an increase in prices over 3-months in housing costs to 5.7% from -7.7% and transportation costs that only fall by 2% after falling by 14% over 6-months. But those two readings are enough to accelerate the headline in the national index to 3.0% from 0.4%.

Inflation rankings The rankings on inflation orders each category on its 12-month price gain historically. This ranking shows the HICP has a 69-percentile rank meaning it has been higher only 31% of the time. On the other hand, the national index has only a 47-percentile rank, which says that it is below the 50% mark, indicating that inflation is below its historic median and that refers to the year-over-year rate of 1.5%. As such, it's below its median and thar is true of all categories of domestic inflation except clothing and footwear, education, healthcare, Recreation, and other goods and services. Costs have become weak by historic standards (below median).

Inflation is no longer falling Whether we use the domestic gauge or the HICP gauge Sweden's inflation is becoming more of a problem based on momentum. The monthly diffusion numbers have been above 50, indicating there is more acceleration than deceleration for the last three months. However, the national CPI numbers have been persistently below and approximately half the gain being registered by the HICP. The HICP is the kind of index that is used across Europe and by the European Central Bank to assess inflation in the European Monetary Union. All this leaves us with a bit more of a complicated view of inflation in Sweden but at the very least the bottom line is that inflation is no longer falling and that's a trend that's been noted across many countries. Even countries like Sweden that have made tremendous progress over where inflation was a year a year and a half ago have seen progress stall. All of a sudden inflation has become stuck and generally stuck at a level that's higher than where the target is. Sweden has its year-over-year numbers in place, but its shorter tenor numbers are showing more pressure, making the outlook more uncertain. But because of the current pace of inflation being stuck here, it is not so uncomfortable as it is being stuck at current inflation rates elsewhere in the world.