Tuesday, December 11, 2007

Swedish Inflation Rises Sharply

As was predicted by me, but few other analysts, Swedish inflation rose sharply in November. There are several different gauges of inflation in Sweden. The traditional Swedish measure rose from 2.7% to 3.3%,the EU-harmonized index rose from 1.9% to 2.4% and the Swedish version of core inflation (excluding interest rates and taxes, instead of food and energy) rose from 1.4% to 1.9%. Although they differ in level, they are all in a clear upward trend.

The analysts who failed to predict this now tries to explain this with the global trend of higher food and energy prices. There is some truth to that, but what they miss is that in the absense of significant monetary inflation the price of food and energy in terms of Swedish kronor would have risen a lot less. And other prices would have been lower. Another very important reason for the rise in inflation is a lagged effect of the significant monetary expansion that started in the second half of 2005. Until now, the effect of this was mostly seen in asset prices. But ultimately some of it will spill over into consumer prices, a trend accelerated as the previous disinflationary factors are losing strength and being replaced by factors helping to push up goods prices, such as the global commodity price boom and high union wage settlements. This trend will probably continue and help push Swedish consumer price inflation even higher.


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