Economic Outlook September 2021 cover image showing a butterflySince 2013 the annual rate of increases in the Danish consumer price index has been exceptionally low. From 2013 to 2020 the rate of inflation averaged just over 0.5%, which was markedly lower than in the preceding eight years when inflation averaged more than 2.5%.

There are several reasons why inflation has declined sharply since 2013. One is goods prices, which partly as a result of globalisation have moved sideways for many years. Consequently, the basket of goods that the average Danish household buys today costs exactly the same as in early 2013.  However, there are major differences among the individual types of goods. Tobacco prices, for instance, have increased more than 40% over the period, while prices of clothing have declined by just over 15%.

Another reason for the low rate of inflation is rents, which account for more than one fifth of the Danish consumer price index. Despite massive growth in home prices, annual growth in rents has declined as for example many cooperative housing associations have taken advantage of the drop in mortgage rates to reduce members’ rents.

Higher inflation going forward

Since early spring, however, inflation measured year over year has increased sharply, with the annual rate so far peaking in May and June at 1.7%, the highest rate since 2012. The sudden pick-up in Danish inflation is mainly due to a sharp increase in goods prices. For example, prices of tobacco, petrol and electricity have risen markedly. In our view, the past months’ price growth marks the beginning of a long period of higher inflation than previously. This is also reflected in our new forecast for this year. We now expect inflation in 2021 to average 1.5%.

Consumer prices will rise faster than previously.

Jan Størup Nielsen, Nordea Analyst

Chart showing: Eight years of exceptionally low Danish inflation are over

If we are right, this would be the highest rate of increase in prices over the past eight years. Inflation next year and in 2023 is expected to pick up slightly to 1.6% and around 1.8%, respectively. We base our expectations of higher Danish inflation over the coming years on four factors in particular:

Higher food prices. Over the past year global food prices have gone up by about 40%. Historically, they have been a good leading indicator of the trend in Danish food prices, which are consequently expected to rise further. As food accounts for more than 10% of the CPI basket, it will provide a major boost to inflation.

Rising rents. With prospects of higher interest rates, the refinancing gains that for years have kept rents down will no longer be available. Coupled with the sharp increase in home prices this should lead to a much larger contribution from rising rents to overall inflation going forward.

Higher wage pressures lead to higher prices Growing labour shortages will likely lead to mounting wage pressures. Many companies will very likely try to pass on the rising labour costs to consumers by hiking prices. Especially prices within construction and services will probably increase as these sectors are overall less exposed to international competition.

Higher taxes to support green transition In Denmark, politicians have for many years tried to influence consumer behaviour through duties on goods and services. In order to meet its ambitious climate targets the government will most likely raise some of these duties over the coming years to finance the green transition. For consumers higher duties mean higher prices, which in turn means higher overall inflation.

This article originally appeared in the Nordea Economic Outlook: A new phase, published on 1 September 2021.

Author:

Jan Størup Nielsen, Nordea Chief Analyst
Jan Størup Nielsen, Nordea Chief Analyst

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