Higher Norwegian inflation

Norwegian inflation rose in April, lifted by higher airline fares. This will probably not affect the

(11.05.2011) Norwegian inflation rose in April, lifted by higher airline fares. This will probably not affect the central bank decision tomorrow, but a hike seems likely. Today Bank of England will issue its inflation report and US trade data will be released.

By Knut A. Magnussen, Senior Economist at DNB Markets

Norwegian core and headline inflation both rose and ended at 1.3% in April. It was expected that inflation would stay unchanged from March. The main reason for the surprise was an increase of 54% for airline fares, boosted by more frequent travels due to Easter and in particular strong growth for foreign destinations. Without transport prices grew in fact less than we had forecasted. The negative trend for food prices continued and prices on clothing and footwear were also somewhat weaker than we had anticipated.

Inflation was higher than expected by Norges Bank in the monetary report in March.
However, as this was caused by temporary effects and inflation is still far below target, this will hardly affect the rate decision tomorrow. However, we believe that other arguments will lead to a hike tomorrow. The market nevertheless reacted by sending the FRAs a bit higher and the NOK a bit stronger.

Chinese inflation fell from 5.4% in March to 5.3% in April. A somewhat stronger decline was expected. Nevertheless this may be the first signs of lower inflation indicating that the monetary tightening is working. Other Chinese indicators are also showing that activity may be about to slow. Retail sales growth was 17.1% in April, less than in March and less than anticipated in advance. Industrial production also rose less than expected, with an increase of 13.4% in April (expected 14.7%). If this tendency continues there may be less tightening of policies going forward.    

Markets are still affected by the uncertainties regarding the debt crisis in Greece. Yesterday rumours of an additional package of 60 bill EUR contributed to calm the markets. Olli Rehn confirmed that EU is working with an additional plan. This calmed the markets. The euro rose vs the dollar and European stock markets recovered all the losses from Monday and even a bit more.  

In the US the federal debt is approaching the debt ceiling. The republicans are pressing hard for spending cuts and require that cuts should be larger than the increase of the ceiling. If the two parties fail to agree, a debt crisis may lead to higher long rates, as was the case in 1996. US export and import prices rose a bit more than expected in April. Import prices are lifted by higher energy prices. Today the trade balance for March is due. If data turn out to be strong, this may add to the weak GDP reading for Q1. However, exports to Japan may have been hampered but the earthquake.     

Swedish industrial production rose more than expected in March. The increase was 0.9% while 0.4% was expected. The level is 15% higher than a year ago. Orders rose 1.1% and are 8% higher than in March 2010. Hence it seems as the strong upturn for the manufacturing sector continues. This may underline the need for more interest rate hikes.   

Today the British inflation report will be released. The previous report in February indicated a high risk of rate hike this spring, despite the fact the MPC was divided. This time we think that the report will be more in line with the market, which has delayed the first rate hike significantly. The main reason is a weaker than expected development for the economy.