Swedish inflation set to ease notably this year, central bank deputy says

Sweden's inflation is expected to fall significantly in the year ahead, driven in part by a temporary reduction in the value-added tax on food and signs of weaker inflationary pressures even when that measure is excluded, First Deputy Governor Aino Bunge said. While some cyclical indicators are mixed, the central bank finds overall real-economy developments broadly in line with its forecast. Bunge noted that geopolitical uncertainty and other factors could still influence inflation and thereby the policy rate.

Key Points

Swedish inflation is expected to decline quite noticeably this year, partly due to a temporary VAT cut on food - impacts consumers and food retail.
Recent data indicate inflationary pressures may be low even excluding the VAT effect - relevant to monetary policy and financial markets.
While cyclical indicators are somewhat mixed, developments in the real economy are broadly aligned with the central bank's forecast - affects broader economic sectors and business planning.

Overview

First Deputy Governor Aino Bunge of Sweden's central bank said on Wednesday that inflation in Sweden is likely to decline "quite noticeably" over the course of this year. The deputy governor attributed part of the expected fall to a temporary cut in the value-added tax applied to food.

Underlying trends

Bunge added that recently published data indicate inflationary pressures may already be subdued even when the mechanical effect of the temporary VAT reduction is taken out of the calculation. That observation suggests the disinflation process may not be driven solely by tax policy but also by softer price dynamics in other areas of the economy.

Economic indicators and forecast alignment

The central bank official acknowledged that cyclical indicators have shown a mixed picture in recent periods. Despite that, she said that developments in the real economy as a whole have been broadly consistent with the bank's own forecast.

Risks that could alter the outlook

Bunge pointed to several factors that have the potential to change the inflation and economic trajectory and, as a result, could influence the policy rate set by the central bank. Among the uncertainties she singled out was the unsettled geopolitical situation at the global level. These risks mean the path for inflation and monetary policy is not without potential deviations from the currently expected course.

Summary of implications

Inflation is expected to fall notably this year, with a temporary food VAT cut contributing to that decline.
Data suggest underlying inflation may be easing even after removing the VAT effect.
Cyclical indicators are mixed, but real-economy developments broadly match the Riksbank's forecast; geopolitical uncertainty remains a key risk to the outlook.

Note on limitations

The remarks reflect the assessment given by the central bank's First Deputy Governor on the date she spoke. The comments identify potential influences on inflation and the policy rate but do not establish a definitive outcome if those factors change.

Risks

The temporary nature of the VAT reduction means the disinflationary effect may reverse once the measure expires - risk for consumer price trends and retail sector.
Mixed cyclical indicators create uncertainty about the strength of underlying demand and inflation persistence - risk for monetary policy decisions and interest-rate-sensitive markets.
An uncertain geopolitical situation globally could alter the inflation and growth outlook and influence the policy rate - risk to exports, energy markets, and overall economic stability.

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Key Points

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