We forecast core inflation at 2.4% in March, as in February. Norges Bank’s forecast and consensus is 2.5%.
One reason why consensus and Norges Bank forecast higher core inflation is probably base effect on food. That pulls up in our forecast too, but it is not enough to raise inflation to 2.5%. It might be that we that we differ on the view on some imported consumer goods especially clothes.
Core inflation has risen from 1% y/y one year ago to now close to the target at 2 ½%. At the beginning domestic prices pulled up (rents, domestic food). But during the winter growth in prices on imported goods has increased strongly. That is not strange given the weakness in NOK during last year.
One of the key questions this time is whether the increase in imported inflation will continue. For March that will to some degree be a question on how the new clothing collections now hitting the shops is priced. Since price growth on clothes was at positive territory already the previous months, after a nearly uninterrupted drop since 1996, we have forecasted an only small increase in y/y growth. Others might have different views.
Add to this that we forecast somewhat lower growth in rents. Y/y growth in rents increased strongly through 2013, but has lately come somewhat down.
The FX market is following key figures closely at the moment. So we will expect somewhat weaker NOK if we are right. We will not change view on Norges Bank on 0.1% points lower inflation, but if it last the coming months it should have a small downward effect on the coming June interest rate path compared to the March path. (Actually enough to revise the June path slightly below the December report all else equal. Remember the impact the upward revision to the path from December to March had on the market. )
Nordea