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ECONOMY

EXPLAINED: Sweden’s rising prices and what’s being done to stop them

Sweden is experiencing the highest inflation in 30 years. What's behind the price rises and what can the government do about it?

EXPLAINED: Sweden's rising prices and what's being done to stop them
The prices on display at a petrol station in Sweden. Photo: TT

What are the factors behind the increase in prices in Sweden? 

The biggest single factor has been the rise in oil and gas prices, which has pushed up transport and manufacturing costs across the world, pushing up prices more or less across the board. 

The Covid-19 pandemic has also disrupted the production and transportation of goods, leading to shortages as the lifting of restrictions releases pent-up demand. 

Finally, most countries have been running expansive fiscal and monetary policies. The US, for instance, has so far sent out $1,400 cheques to 127 million households. 

SEB’s senior economist, Robert Bergqvist, told The Local that Sweden if anything faced slightly lower inflationary pressure than other countries. 

“One reason why Sweden has lower inflation is that we still have slower wage growth, because we have wage agreements that last for three to four years,” he said. 

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What has the government done to help people in Sweden? 

Quite a lot. 

In January it offered an electricity rebate of up to 2,000 kronor per month to all those hit by high electricity prices.

On March 14th, it launched a package of subsidies for car-owners. 

This included a pay-out of between 1,000 to 1,500 kronor to every car-owner in the country, which has cost the government 13.9bn kronor. 

It also included a temporary reduction in tax on petrol and diesel to the lowest level allowed by the European Union. The government said that this would reduce the price by 1.3 kronor per litre. This will reduce the government’s tax intake by 3.8 billion kronor. 

Finally, it has also a temporary increase in housing benefit for families with children, which could provide up to 1,325 kronor in extra benefits a month between July and December this year. 

Are the other political parties satisfied? 

Of course they’re not. This is an election year.

The Moderate Party are pushing for a tax cut that will reduce the price at the pump by five kronor a litre for diesel, and “several kronor” for petrol.

The Sweden Democrats party has proposed a package it claims will reduce the price of diesel by 9.45 kronor and petrol by 6.50 kronor, at a cost of 34bn kronor. 

The only party that is against reducing fuel tax is the Green Party, which instead wants to pass 20bn kronor to households living in the countryside to help them deal with the additional costs. Subsidising fuel, the party argued, meant “filling Putin’s warchest”. 

What about economists? 

Robert Bergqvist said that Sweden’s relatively strong government finances meant that it could easily afford to be this generous to lessen the pain for citizens. 

“It’s nothing that will jeopardise the very strong government finances that we have,” he said. “Sweden can afford a more expansionary fiscal policy.” 

The only risk, he argued was that having what he called a “slightly more expansionary fiscal policy” could end up pushing prices up even higher. “It could be a bit inflationary,” he said. 

What can Sweden’s central bank do? 

Controlling inflation is one of the key purposes of a central bank, and Sweden’s Riksbank is instructed to aim for inflation of two percent. 

The Riksbank’s current position is that there will be no increase in interest rates until the second half of 2024. But the prices rises of the last six months will almost certainly force it to act sooner. 

In an interview with Sweden’s state broadcaster SR last week, the bank’s governor, Stefan Ingves, said that the bank would need to change its position. Most economists in Sweden now expect a rate rise in the second half of this year, or at the start of next year. 

Ingves’s deputy, Anna Breman, said in a speech on Wednesday that it, now “now looks like it would be reasonable to bring forward a rise in interest rates”. 

Will Sweden manage to get prices under control? 

Bergqvist said he believed that the Riksbank had a relatively short window in which to act if it was to avoid the risk that high inflation expectations become firmly established among companies and wage earners. 

“We have new wage negotiations which will start at the end of this year, and you will have new wage deals in the first quarter of next year,” he said. 

If the unions expect higher inflation in the coming years, they are likely to push for more generous wage hikes, which could in turn lead to rising costs for companies, and so increase inflation still further. 

“When I talk to companies and households, everyone says that we have an inflation problem, that prices are going up, and I think we haven’t seen the worst yet,” he said. “I think inflation will continue to rise. Companies say costs are rising and that it’s also quite easy to raise prices right now.” 

If the Riksbank does not take action soon, he argued, then high inflation expectations will become more too established to reduce much higher interest rates, which could cause a recession.  

“And that will make it much more difficult for the Riksbank to bring inflation down to two percent,” he said. 

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ECONOMY

Sweden’s central bank brings in biggest rate hike in 22 years

Sweden's Riksbank has raised interest rates by 50 points to 0.75 percent, in its biggest rate hike in 22 years.

Sweden's central bank brings in biggest rate hike in 22 years

“Inflation is much too high and is spreading throughout the economy,” the bank’s governor, Stefan Ingves, said. “This is noticeable and expensive, both for households and others, and is creating uncertainty in the Swedish economy. That’s why we need to hike the rate.” 

The central bank explained in a press release that a larger hike was required to “to ensure that inflation returns to target” and make it “clear to price- and wage-setters that the inflation target can continue to be used as a benchmark”. 

Annika Winsth, chief economist at the Nordea bank, said that anything less than a so-called “double increase” would have left inflation to continue increasing. 

“Anything else would have messed things up,” she said. “We have extremely high inflation, and also high domestic inflation. That’s why there’s a need to push back and the interest rate weapon is the tool the Riksbank has.” 

“What we’ve seen today is no shock,” agreed Jens Magnusson, chief economist at SEB. “Anything else apart from this raise by 50 points would have been a shock. Inflation has taken off in a way the Riksbank hadn’t expected. The signal this gives is that the Riksbank takes it seriously and is trying to get a grip on the situation.” 

In the press release, the bank said that prices for goods, food and services in Sweden had been increasing “considerably faster than expected” since the start of the year. 

The imbalances that have arisen as a result of demand bouncing back from the pandemic faster than businesses ability to supply, it said, had been “reinforced” by Russia’s invasion of Ukraine and new pandemic-related restrictions in China. 

 “The high rate of inflation in Sweden and abroad is affecting households and is undermining purchasing power,” it concluded. “Central banks around the world are now tightening monetary policy to cool down economic activity and bring inflation down.”

The Riksbank said that companies had begun to raise prices “unusually strongly in relation to how much costs have increased”, which was causing inflation to accelerate faster than expected. 

The bank said it was now predicting that its key interest rate would rise to 1.36 percent in the last three months of 2022, up from the 0.81 percent it predicted at the end of April. 

Between the start of April and the end of June next year, it will rise to 1.9 percent (up for 1.18 predicted in April), and in the last six months of 2025, the rate will hit 2.06 percent, it predicted. 

The central bank expects inflation to average at 7.6 percent over 2022 as a whole, up from six percent in its previous prognosis, falling to 7.1 percent in 2023. 

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