Low Norwegian inflation

illustration: Norwegian krone

(12.09.2011) Norwegian inflation was markedly lower than expected in August. This is another argument for the central bank to lower the rate path in October.

By Knut A. Magnussen

Norwegian inflation was significantly lower than expected in August. Core inflation ie except from energy prices and tariffs, rose only 0.8% (y/y). It was expected that inflation would be 1.2% - also by Norges Bank. In particular food priced and airline fares dampened inflation. Food prices fell partly due to discounts on frozen fish products and due to a seasonal decline in prices on fresh vegetables. Airline fares are very volatile, fluctuating considerable form month to month. Nevertheless, prices fell for seven out of twelve main sub categories. Hence the decline seems fairly broad based. Headline inflation rose 1.3% - also substantially less than expected by the central bank in June (1.9%). The low inflation is another argument for a downward adjustment of the rate path in August in the upcoming monetary policy report in due 19. October. The recent strengthening of the NOK will – if sustained – contribute to keep inflation low for a longer period. The NOK has held up well vs, the euro over the weekend but has depreciated markedely vs the dollar.
Market unrest seems to continue. Friday afternoon the resignation of ECBs Jürgen Stark, due to his disagreement over ECBs purchase of government bonds, induced large market movements. In addition rumours that Greece was about to default added to fears and sent Greek CDSs and government bond yields to new record high levels. European stock markets fell around 2.5%, while the German DAX ended the day down 4%. Also US markets were negatively affected, falling around 2.5% on average. The decline continued in Asia, with the Nikkei down 2,2% and Hangseng falling 3.8%. FX markets were also affected. The euro fell significantly versus the dollar and reached the lowest level in six months. This morning the EURUSD is trading around 1.3540. US bond ten-year bond yields fell some 6 bps. to 1.92%. Not surprisingly the oil prices also fell on the news, while the gold price more surprisingly also fell. The latter may be due to profit taking.
The Greek government yesterday announced that a two-year property tax will be implemented. This is estimated to raise tax income by 2 bill. Euro. This is probably enough to satisfy the demands from EU and IMF. The EU comissionary Olli Rehn seemed satisfied with the tax, hence indicating that the next tranche of the emerging loan will be paid as planned. The meetings will resume in Athens this week. The G7-meeting in Berlin this weekend did as expected not lead to new measures. However, the group promised to tale all action necessary to support the banking system and the financial markets. Central bankers will discuss policy measures today in Switzerland. An important topic will be the very tight dollar liquidity in European markets causing problems for many banks.      
Chinese macro data released this weekend confirmed high activity and indicate that the economy has so far been little affected by the slowdown in the US and in Europe. Industrial production, investments and retail sales all grew strongly.
Swedish data for industrial production showed a strong gain in July, counteracting the drop in June. Orders also rose somewhat, pointing in de4riection of still good production activity going forward. However, PMIs has indicated that activity is levelling off.
This week seems to be less interesting than the previous one from a macro perspective. Tomorrow inflation for August is due in the UK and in Sweden, while similar data for the US and the eurozone are due on Thursday. Besides US retail sales for August and consumer confidence for September will also attract attention this week.