? Core inflation will drop ? The gap to Norges Bank will not change from June, most likely ? Core inflation in Norway will most likely drop in July from 1.4% in June. We forecast 1.2% in July in line with consensus while Norges Bank?s forecast is 1.3%. If we end up at 1.2%, core inflation will have been 0.1% point below Norges Bank?s forecast both in June and July. Since Norges Bank in June said the chance of a cut in September is 50% if all indictors develop as expected such a gap could, all else equal, be enough to trigger a cut. However, since the NOK is 1- 1 ½% weaker than expected and Norwegian key figures have been somewhat stronger than implied by Norges Bank?s forecast, core inflation must come more down if we are to start considering the possibility of a cut. Normally we would say that core inflation at 1% or 0.3% point below Norges Bank?s forecast would be enough to counteract the weaker NOK and somewhat stronger key figures. That is of course if the inflation gap would not a reflection of some obvious temporary factors ( Norges Bank will have one more inflation figure before the September meeting). We base this on Norges Bank?s usual reaction to deviating inflation readings , but have to admit that the contribution from higher-than- forecast inflation in the June report was much smaller than the bank?s normal ?reaction function? would have implied. A core inflation as low as 1% in July cannot be excluded. We have no problem seeing the possibility of core inflation at 1%. The main reason why we and, we guess, most other analysts forecast a drop in inflation from June to July is that airfares increased by a hefty 22.5% m/m in July last year, in clear contrast to the usual seasonal pattern. It could be that the seasonal pattern has changed or it could be a random deviation. We have forecasted a much more moderate increase this year, but still above the seasonal pattern, and consequently lower y-o-y growth. We have no trouble, however, seeing core inflation at 1% or 1.4% due to a different outcome in airfares. And then of course it is the start of the seasonal clothe sale. In other words the uncertainty is rather high. All in all, if our main scenario turns out to be right, nothing much would happen. But the possibility of a market-moving outcome is rather high. Especially if we end up at 1% or lower, a sharp weakening of the NOK and significantly lower forward rates must be expected. Ironically and in line with the pattern this year, the NOK could weaken enough to rule out the possibility of a cut. M-o-m growth and contribution to change in y-o-y
↧