Somewhat higher inflation
Core inflation fell from 2.5% in August to 1.7% in September surprising everybody including Norges Bank. We believe inflation increased to 2% in October which will be published 11 November at 10.00. That will still be 0.3% points below Norges Bank, but the gap will decrease from 0.5 to 0.3% points. Consensus is not yet known, but we guess most will do some of the same analysis as we do and forecast somewhat higher core inflation, at say 1.9 or 2%. Needless to say perhaps, core inflation has been very volatile lately, so be prepared for surprises.
Not that strong influence on rates
At the last MPC meeting Norges Bank argued that on the one hand NOK was weaker than expected, but on the other inflation was lower, indicating no significant change in its view on interest rates. If inflation in October is 0.3% points and not 0.5% below forecast one could argue that it strengthens the case for a higher rate path. Inflation 0.3% points below Norges Bank forecast should, judged by its latest signals, have an only marginal downward effect on its interest rate forecast. NOK currently being 2 ½ -3% weaker than forecasted should have a much stronger upward effect on the interest rate forecast.
Still, we do not believe Norges Bank will raise the interest rate forecast in December. There are some signs of weakness in the domestic economy and we believe they will become even more clear by December. That the market now prices lower rates abroad also argues against lifting the interest rate forecast.
Food, clothes and airfares
Food prices most likely fell in October in line with the usual seasonal pattern, but probably not as much as last year. Consequently year on year growth should increase. Add to this that prices on clothes had not fully recovered after the seasonal sale in September and therefore most likely will rise further in October in contrast to last year. Air fares should also rebound after a low level in September also pulling up y/y growth.
M-o-m growth and contribution to change in y-o-y
Nordea