Breman: Inflation needs to fall further

High price pressure in industries that were hit hard during the pandemic

The hotel and restaurant industry was hit hard by the pandemic. The COVID outbreak and the restrictions imposed caused the demand for tourism-related services to plummet, while many costs increased. With pandemic restrictions lifted, tourism-related services have increased sharply in the last two years. In addition, the weak krona has made it advantageous for foreign tourists to come here.

But the tourism industry is one of many sectors in the economy performing well. Demand in the economy has been high overall, which has made it easier for many companies to pass on their higher costs to consumers. And prices have risen widely, in all industries.

“High inflation creates uncertainty and erodes household purchasing power. To return to low and stable inflation, we have gradually raised the policy rate,” said Ms Breman.

“We can see that the policy rate hikes are having an effect. Inflation is on the way down. Energy prices have fallen sharply, and food prices have moved sideways in recent months. This benefits all households, but especially poorer households, as energy and food are a relatively large part of these households’ expenses.”

Ms Breman stressed several favourable conditions for inflation to continue falling.

“Producer prices have fallen, wage increases are moderate and inflation expectations are stable. The Swedish economy is slowing down and demand is subdued. But inflation is not yet at target. Underlying inflation is still high, not least in the service sector. For inflation to be sustainably low and stable, we need to see a clearer downward trend in more price categories. The policy rate may need to be raised further.”

Future developments affect inflation prospects

The service sector, which includes the tourism industry, employs many people throughout Sweden. The employment rate is currently at a record high, but we are now beginning to see signs of a slowdown. The social partners have shown great responsibility, with a 2-year agreement with moderate wage increases. As a result, it will be possible to reach the inflation target with employment remaining at a high level.

Ms Breman pointed out that it will be important to follow companies’ pricing behaviour now that wage increases are moderate and producer prices have fallen. Household savings and consumption are also factors that are important for inflation. Households’ saving rate was high during the pandemic. This has enabled many of them to continue to consume, despite the cost of living increases and higher interest rates.

“How much will households be able to, or want to, dip into their savings in the future to consume? Will households continue to prioritise services such as travel, eating out and concerts to the same extent as today? How this affects inflation and employment will be important going forward,” said Ms Breman.

“Ahead of our next monetary policy decision on 22 November, it will be important to assess how these and other factors affect economic activity and inflation prospects for both the service sector and the economy as a whole,” she concluded.