High inflation for longer

• Inflation has continued to increase over the recent months, particularly due to higher electricity prices.

• The underlying price pressure in the economy is elevated but not spinning out of control.

• We expect core inflation will continue higher and keep headline inflation elevated. We expect 7.9% for 2022 on average and 4.9% in 2023.

Danish inflation increased from 10.0% in September to 10.1% in October. Energy and food prices are key drivers but inflation is also broad based. 10.1% is 1.6%-point higher for October than what we expected in early October and this can largely be explained by energy prices. The very large spot price declines we have seen on electricity would usually pull inflation down significantly. However, it looks like price increases on fixed price agreements have been so substantial that CPI increased instead. It is unclear what has exactly happened but it changes our view on the inflation outlook for 2023 substantially. District heating prices have also increased earlier than expected and we think there is more to come in the New Year.

The underlying price pressure in the economy remains elevated but the price pressure (CPI excluding energy and unprocessed food, taxes and subsidies) has not accelerated. M-o-m changes have actually moderated over the recent months.

Retailers are still seeing price increases ahead, even if the trend is declining somewhat. Thus, it looks like there remains a backlog of cost that has yet to feed through to consumers. The labour market remains strong and wage growth has picked up. That means, consumers still have more money to spend and that pushes prices higher.

We continue to pencil in an elevated underlying price pressure lifting core inflation further, which is also underpinned by the historically tight labour market. The pressure should begin to wear off by the end of 2023, on the back of a looser labour market by then. Higher energy prices is the key reason for lifting the inflation forecast, though.

We change our inflation forecast and now expect 7.9% inflation in 2022 (previously 7.5%) and 4.9% in 2023 (previously 3.4%).

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