CPI: -0.5%, 0.5% y/y (SEB expected -0.1%, 0.8% y/y, previous 0.0%, 0.5% y/y)
CPI-ATE: -0.3%, 1.2% y/y (SEB expected 0.0%, 1.5% y/y, previous 0.4%, 1.4% y/y)
Core inflation came in on the low side after having rebounded markedly in May. The CPI-ATE measure (excluding taxes and energy) fell from 1.4% y/y to 1.2% y/y. This was below our expected 1.5% y/y and 0.5%-points lower than Norges Bank’s forecast from the June MPR. The lower than expected CPI-ATE is partly explained by lower prices of furniture and clothes (attributed to sales). Food prices have still not catch up with the previous rise in PPI also contributing negatively to core inflation.
The volatile airfares component tends to lift CPI-ATE in June. This year however, air fares increased already in May (+11.5% on the month adding 0.4%-points to core CPI) which reflects the smaller than normal rise in June. Although this component only counts for slightly less than 1% of the CPI-ATE basket the large swings are enough to impact the monthly pattern.
Overall CPI inflation declined 0.5% resulting in a stable y/y rate at 0.5%. The fall in CPI is due to lower electricity prices following the mild winter which has resulted in higher levels of water in the basins. Electricity prices are now at the lowest level since 2008.
All in all, although the impression is that when looking trough the monthly volatility core inflation is trending slowly higher, the trend is definitely not convincing. Thus, with CPI-ATE 0.5%-points below Norges Bank’s forecast the bank should stick to its June optimal rate path which calls for a rate hike around year-end at the earliest. We’ll receive another set of inflation data before the August rate decision. Although our inflation forecast for he next couple of months is a tad below Norges Bank, at this stage we do not believe this is enough for the bank to cut rates in line with market pricing as domestic fundamentals call for the opposite. We continue to unchanged policy rates until March 2013.
SEB