Why inflation in Norway continues to remain high
Factors like the weak krone and wage increases are keeping price rises in Norway high despite there being a plan in place to push down inflation.
The latest figures show inflation in Norway was 6.4 percent in June compared to the same month a year before.
Core inflation, according to figures from national data agency Statistics Norway, is even higher at seven percent. Core inflation measures price rises but excludes energy prices and taxes.
Inflation in Norway has remained high in Norway for over a year, despite plans from the central bank, Norges Bank, to try and bring it down.
READ MORE: What Norway's latest inflation figures mean for your finances
In short, Norges Bank is using interest rate increases to slow down economic activity and reduce inflation to more manageable levels.
It has raised the key policy interest rate to the highest level since 2008, 3.75 percent, in order to do so. Despite that, it appears as if inflation will not slow down anytime soon.
One factor keeping prices high despite the plan to cut down inflation is the weak krone. This means imported goods into Norway cost more due to the exchange rate. This increased cost is typically passed on to consumers.
Marius Gonsholt Hov, chief economist at Handelsbanken, told E24 that wage increases also have the knock-on effect of increasing inflation. This year has seen higher-than-typical wage increases due to the initial period of high inflation. In turn, firms put prices up to cover higher labour costs.
Hov told E24 that inflation in Norway would have increased more without interest rate increases.
"You can turn it around a bit (from why isn't inflation lower) and say that you would probably have had much higher inflation if it hadn't been for the rise in interest rates," Hov said.
Gisle James Natvik, a professor at BI Norwegian Business School, said that while interest rate increases work, it can take time for the effect to become obvious.
"The path from interest rate changes to inflation is indirect, takes a very long time, and is difficult to measure," he explained.
Norges Bank has set itself the target of getting inflation down to two percent. However, it has given itself until 2026 to make this happen.
It may also be a case of waiting for the situation to improve elsewhere before price increases start slowing to a more manageable level.
Martin Blomhoff Holm, a postdoctoral researcher at the University of Oslo, said that while monetary policy - such as the Norges Bank raising rates - has an impact, Norway will likely follow the trend of other countries.
"Norwegian monetary policy helps a little, but essentially, price growth in Norway will decrease because it decreases abroad," he said.
Experts The Local have spoken to have shared that the market believes that the plan to bring down inflation in Norway is working, even if it will take time.
READ MORE: Is Norway's plan to keep prices down working?
"Hov said that the krone strengthening or stabilising in the future would help push inflation down along the line.
"This (a weak krone) will be able to ensure that the imported price increase remains high in the months ahead as well. But if the krone exchange rate were to stabilise, or if more of the strengthening we have seen recently is allowed to continue, this will be good news for inflation," he said.
Norges Bank raising interest rates in the future will contribute to strengthening the krone. This is because higher interest rates in Norway make the country more attractive to investors, strengthening the krone. Although, if interest rates in Norway end up weaker than in other countries this could weaken the krone.
Other factors such as energy prices could help strengthen the krone, which would cut imported inflation, Dane Cekov, a currencyy strategist at Nordea, recently told The Local.
The Norwegian krone will likely remain under pressure in the time ahead. For it to strengthen, energy prices would need to rise, and Norway would need to have higher interest rates compared to other developed economies," Cekov said.
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The latest figures show inflation in Norway was 6.4 percent in June compared to the same month a year before.
Core inflation, according to figures from national data agency Statistics Norway, is even higher at seven percent. Core inflation measures price rises but excludes energy prices and taxes.
Inflation in Norway has remained high in Norway for over a year, despite plans from the central bank, Norges Bank, to try and bring it down.
READ MORE: What Norway's latest inflation figures mean for your finances
In short, Norges Bank is using interest rate increases to slow down economic activity and reduce inflation to more manageable levels.
It has raised the key policy interest rate to the highest level since 2008, 3.75 percent, in order to do so. Despite that, it appears as if inflation will not slow down anytime soon.
One factor keeping prices high despite the plan to cut down inflation is the weak krone. This means imported goods into Norway cost more due to the exchange rate. This increased cost is typically passed on to consumers.
Marius Gonsholt Hov, chief economist at Handelsbanken, told E24 that wage increases also have the knock-on effect of increasing inflation. This year has seen higher-than-typical wage increases due to the initial period of high inflation. In turn, firms put prices up to cover higher labour costs.
Hov told E24 that inflation in Norway would have increased more without interest rate increases.
"You can turn it around a bit (from why isn't inflation lower) and say that you would probably have had much higher inflation if it hadn't been for the rise in interest rates," Hov said.
Gisle James Natvik, a professor at BI Norwegian Business School, said that while interest rate increases work, it can take time for the effect to become obvious.
"The path from interest rate changes to inflation is indirect, takes a very long time, and is difficult to measure," he explained.
Norges Bank has set itself the target of getting inflation down to two percent. However, it has given itself until 2026 to make this happen.
It may also be a case of waiting for the situation to improve elsewhere before price increases start slowing to a more manageable level.
Martin Blomhoff Holm, a postdoctoral researcher at the University of Oslo, said that while monetary policy - such as the Norges Bank raising rates - has an impact, Norway will likely follow the trend of other countries.
"Norwegian monetary policy helps a little, but essentially, price growth in Norway will decrease because it decreases abroad," he said.
Experts The Local have spoken to have shared that the market believes that the plan to bring down inflation in Norway is working, even if it will take time.
READ MORE: Is Norway's plan to keep prices down working?
"Hov said that the krone strengthening or stabilising in the future would help push inflation down along the line.
"This (a weak krone) will be able to ensure that the imported price increase remains high in the months ahead as well. But if the krone exchange rate were to stabilise, or if more of the strengthening we have seen recently is allowed to continue, this will be good news for inflation," he said.
Norges Bank raising interest rates in the future will contribute to strengthening the krone. This is because higher interest rates in Norway make the country more attractive to investors, strengthening the krone. Although, if interest rates in Norway end up weaker than in other countries this could weaken the krone.
Other factors such as energy prices could help strengthen the krone, which would cut imported inflation, Dane Cekov, a currencyy strategist at Nordea, recently told The Local.
The Norwegian krone will likely remain under pressure in the time ahead. For it to strengthen, energy prices would need to rise, and Norway would need to have higher interest rates compared to other developed economies," Cekov said.
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