(Bloomberg) -- Sweden’s inflation rate fell further from the Riksbank’s target in August, increasing the likelihood that officials will speed up an easing campaign to aid a sputtering economy.
The CPIF measure of annual price increases fell to 1.2% last month, according to a release published Thursday by Statistics Sweden. That’s the lowest reading in almost four years, and marks a third consecutive month of inflation below the 2% target.
It was also lower than economists’ expectations for a 1.4% gain as well as the Riksbank’s 1.7% estimate.
The data comes as central banks across the developed world are making policy less restrictive or preparing for it, with the Riksbank weighing whether to cut its benchmark rate by two or three quarter-point moves in the three remaining meetings this year. The European Central Bank is widely expected to lower its key rate again later today.
Officials have advocated taking borrowing costs lower in a gradual manner, and Riksbank Governor Erik Thedeen has hinted that he favors reducing the rate to 2.75% by the end of the year, from 3.5% currently.
The August outcome “doesn’t change our expectation that the Riksbank will cut the policy rate by 25 basis points later in September, but it could fuel speculation about a 50 basis-point cut at that meeting,” Lars Kristian Feste, head of fixed income at Ohman Fonder, said in emailed comments. He added that while there is little to gain for the central bank from a larger cut at this juncture, it could become a reality if inflation continues to print lower than expected and the US Federal Reserve opts for a half-point rate reduction next week.
What Bloomberg Economics Says...
“The downward surprise in Sweden’s August inflation is more than a one-off on the headline number – it suggests a milder outlook than our earlier assumptions – especially in energy prices. That calls for a shift down in our forecasts, as well as a change to our interest rate call to include one additional cut in 4Q24. That would take the policy rate to 2.75% by year-end.”
—-Selva Bahar Baziki, economist. Click here to read more.
Rising unemployment and a sluggish Swedish economy have increased pressure on the central bank to dial down restriction, especially as the government has declared victory in the fight against inflation and vowed to boost spending.
The drop in annual CPIF inflation was explained by lower energy prices than last year, and an underlying measure that strips out that effect was in line with expectations from economists as well as the Riksbank, at 2.2%. Riksbank officials will take particular note of that number as they seek assurance that core inflation appears stable around the 2% target, with moderate price increases on services.
“In parts of Sweden, the electricity spot price hit rock bottom, dragging down flexible-rate consumer electricity prices and the entire CPI with it, even somewhat more than we had forecast,” Svenska Handelsbanken AB’s head of forecasting, Johan Lof, said in a note. “This energy-price drag will wear off in the months ahead, when we assume the price of electricity rises to the more normal levels priced in the futures market.”
--With assistance from Joel Rinneby.
(Adds details, comments from economists throughout)
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