Core inflation rebounded from 1.7% in September to 1.9% in October, but was still well below the 2.5% in August. Both consensus and Norges Bank believe in another rise in November to 2.0%. We do not share that view and believe core inflation will drop to 1.8%. The main reason being lower food prices. We have indications of a price war on groceries after a price survey in the Norwegian newspaper VG back in October. Add to this that we believe airfares dropped rather sharply in November.
If we are right one must expect a weaker NOK and somewhat lower forward rates. We would however advise against doing too much out of one month with inflation below Norges Bank’s forecast. We view the drop in inflation as temporary and share Norges Bank view that inflation will rise looking ahead due to the weakness of NOK. Prices on clothes are actually pulling up in our November forecast partly as reflection of the development in NOK. Lower inflation is not the main reason why we forecast two rate cuts next year, but weaker growth and higher unemployment.
Nordea