New data surprised economists across Scandinavia. Sweden has pulled far ahead of Norway
The reduction of VAT on food quickly translated into lower prices in Sweden. After cutting the rate from 12 to 6 percent, inflation dropped more than forecast, and food prices clearly fell already in April.
The inflation target in Sweden and Norway remains identical at 2 percent.
Fot. Adobe Stock, licencja standardowa
In April, the CPIF index fell to 0.8 percent. This is the lowest level in months. In Norway, inflation remains higher. New data from Sweden's statistical office SCB show a strong slowdown in price growth. In March, inflation was still at 1.6 percent. Economists surveyed by Bloomberg expected a reading of 1.2 percent. The main driver of the drop was food prices after the VAT cut.
Cheaper food lowered inflation
Food prices in Sweden fell by 5.5 percent month-on-month in April. This is the result of the authorities' decision to reduce VAT on food from 12 to 6 percent. The change came into effect at the beginning of April. SCB indicates that this move had the strongest impact on the inflation data.
In Norway, the VAT rate on food remains higher at 15 percent. Inflation remains higher than in Sweden and closer to the central bank's target. Both countries have an identical inflation target of 2 percent. Differences in tax policy are beginning to change the pace of price growth on both sides of the border.
In Norway, the VAT rate on food remains higher at 15 percent. Inflation remains higher than in Sweden and closer to the central bank's target. Both countries have an identical inflation target of 2 percent. Differences in tax policy are beginning to change the pace of price growth on both sides of the border.
In Norway, VAT on food is 15 percent.Photo: stock.adobe.com/standard license
Riksbanken is monitoring the situation
On March 19, Riksbanken left the main interest rate unchanged at 1.75 percent. The bank also did not change its forecasts. According to current assumptions, interest rate hikes in Sweden are not expected before 2027. In Norway, the inflation situation remains less stable. Norges Bank continues to take a cautious stance.
Riksbanken also emphasized that the war increases uncertainty around economic forecasts. The bank noted that it is still unknown what the lasting effects of the conflict will be. Lars Kristian Feste from Lannebo assessed that the negative effects of the war in the Middle East are not yet visible in the Swedish economy. He also added that the market does not expect a change in interest rates at the next Riksbanken meeting.
Riksbanken also emphasized that the war increases uncertainty around economic forecasts. The bank noted that it is still unknown what the lasting effects of the conflict will be. Lars Kristian Feste from Lannebo assessed that the negative effects of the war in the Middle East are not yet visible in the Swedish economy. He also added that the market does not expect a change in interest rates at the next Riksbanken meeting.
Feste also believes that the latest inflation data is unlikely to lead to major changes in the central bank's forecasts. According to him, the main reason for the drop in inflation remains the reduction of VAT on food. In Sweden, increasing attention is also being paid to mortgage costs, which are rising despite no interest rate hikes. The topic remains important for the Norwegian financial market as well.
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