Swedish inflation moves higher....

Swedish UND1X underlying inflation, adjusted for taxes and mortgage interest rates, accelerated to 1.0% in August from 0.7%. This compares to market expectations for inflation to rise to 0.9%. The Riksbank projected in its dovish June Inflation Report that underlying inflation would stand at 0.4% in August, but the latest indications from the Executive Board suggest that these forecasts have subsequently been revised higher (the next set of Riksbank forecasts is due on 20 October).
Details of the CPI report that a lot of the upside in prices related to energy, for which the underlying inflation measure is not adjusted. Prices of fuel and electricity and heating both contributed 0.1% points to the CPI rise. In addition, the post-sales rebounds in clothing and footwear prices also added further 0.1% points to the CPI rise.
The outcome is consistent with the previous evidence that inflation "surprises" for the Riksbank often relate to unexpected developments in commodity prices. For example, since the beginning of 2003 we find a positive 0.50 correlation between the YoY change in the Reuters/CRB commodity price index in SEK terms and the outcome of the actual UND1X annual inflation rate vs the latest Inflation Report forecast.
Although the Riksbank continues to see the UND1X unadjusted for energy as the best measure of cyclical inflation pressure, members of the Executive Board have also made it clear that volatile energy prices receive special consideration in the index. As such, the fact that upside surprises related mostly to energy prices, should limit the scope of market impact.
However, with markets already in a fairly hawkish mood after yesterday’s Riksbank minutes, the outcome should nevertheless enforce expectations that the next move in Swedish rates will be up. The 2Y SEK swap spread, which has explained ¾ of the variation in EUR/SEK this year already implies the currency pair at 9.20 according to the historical relationship. The only thing that keeps EUR/SEK from falling at the moment is the lack of pressure on USD/SEK. If we add the USD influence on EUR/SEK into the regression, the current "fair value" in the currency pair rises from 9.20 to 9.27.