Will falling inflation in Denmark mean lower living costs?

Inflation took another step backwards in February, according to new figures from Statistics Denmark. But how long will it be before the financial burden on consumers lightens?

Will falling inflation in Denmark mean lower living costs?
A low-price supermarket in Aarhus. Inflation has fallen for four consecutive months but when will consumers feel a cost of living improvement? Photo: Bo Amstrup/Ritzau Scanpix

Consumer prices last month were 7.6 percent higher than they were in February 2022, Statistics Denmark said in preliminary inflation figures published on Friday.

That represents a slight reduction of inflation compared to January, where prices were up by 7.7 percent compared to a year prior.

The small difference means that a trend of declining inflation has continued for a fourth consecutive month after a peak inflation of 10.1 percent was registered in October.

February’s slight drop can be attributed primarily to falling energy prices. Rent costs and food prices continue to be an upwards force on the inflation metric, however.

READ ALSO: Lower energy prices take air out of Danish inflation

Core inflation (Danish: kerneinflation), a measure of inflation which excludes food and energy prices, is sometimes used by economists as a measure of how entrenched inflation has become in other areas of the economy.

That metric was up slightly in February to 6.7 percent from 6.6 percent in the previous month, and is yet to peak.

“In other words, inflation is still stubborn and 2023 will be a year of high inflation like 2022,” senior economist with Sydbank, Mathias Dollerup Sproegel, wrote in an analysis provided to news wire Ritzau.

“This wildly high inflation hurts private finances. A typical family with children in the last year would have to find 30,000-40,000 kroner extra in their household budget to buy the same items as a year ago,” he said.

Lower inflation does not mean falling prices, but that prices increase at a lower rate than previously.

However, an inflation rate lower than wage increases will be experienced by consumers as an overall improvement in their purchasing power.

READ ALSO: Danish store workers get pay rise in new bargaining agreement

“Today’s numbers correspond to an average family with children needing around 2,950 kroner more for their monthly consumption than a year ago,” senior analyst and private economist Louise Aggerstrøm Hansen told Ritzau in an analysis of the figures.

“Even if you take into account wage increases in the meantime, this will be a case of a fall in living standards,” she said.

Although inflation and high prices appear to be resilient, there is also cause for optimism in the figures, according to the economist.

“The difference is that while the strain on family finances just kept increasing in 2022, the arrow is now pointing in the right direction for private Danish finances,” she said.

“We expect a modest falling inflation coupled with relatively good wage increases will meaning a restoration of purchasing power so we are back at the level from 2021 by the time we reach the end of 2024,” she said.

READ ALSO: Why prices in Denmark could still increase despite falling inflation

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Danish national bank says wage increases will keep inflation high

Thousands of people who work in Denmark are set to receive wage increases under new collective bargaining agreements, but the flip side for private finances is a likely knock-on effect maintaining inflation.

Danish national bank says wage increases will keep inflation high

Wage increases given to people under the Danish labour system in 2023 and 2024 could help to keep inflation levels up, according to a new forecast by the Danish central bank, Nationalbanken, published on Tuesday.

The central bank publishes two forecasts each year for expected developments in the Danish economy.

“Inflation in Denmark is expected to come down significantly during 2023 as the inflation pressure driven by global conditions eases,” the bank stated.

“But that will be replaced by an inflation pressure driven by domestic circumstances resulting from higher wage increases,” it wrote in the forecast.

Collective bargaining agreements between employer confederations and trade unions this spring are likely to see wage increases for workers across sectors, due to higher living costs connected to inflation.

READ ALSO: Danish store workers get pay rise in new bargaining agreement 

Inflation is predicted to finish at 4 percent for the whole of 2023. That is lower than the inflation rate for the whole of 2022.

Next, inflation will reach 3.6 percent for the year according to the new forecast. This is higher than the figure given for 2024 in the previous forecast, which was 1.7 percent.

Core inflation or kerneinflation, a measure of inflation which does not account for the price of energy and raw food materials, is expected increase as a result of the wage rises.

The measure is predicted to end at 6.2 percent this year and 4.3 percent next year.

The central bank called for political measures to keep a rein on inflation.

“At the current time, Denmark and the eurozone have largely the same challenges in relation to bringing down inflation with an outlook of wage increases which are not compatible with stable, low inflation in the long term,” the bank writes.

“Potential new financial policy that increase capacity strain on the economy should, as a minimum, be responded to with measures that ease the strain in other areas,” it said.

The risk of inflation taking hold in a spiralling increase of prices and wages still exists, the central bank argues. As such, it advocates political intervention should the risk increase.

In such a spiral, higher wages result in higher costs for companies, which raise their prices, meaning consumers need renewed wage increases to maintain their purchasing power.

READ ALSO: Will falling inflation in Denmark mean lower living costs?