Inflation is the word on everyone’s lips. The list of when inflation is mentioned is long: interest on housing and car loans, more expensive goods, imported inflation and, not least, shrink inflation.
On Friday, the inflation figures for April will be published. In this connection, chief economist Kyrre Knudsen at Sparebank 1 SR-Bank has looked at the rise in prices of several goods and services, and explains how these affect each part of the economy.
This is inflation
Inflation is measured by checking the prices of a large number of goods and services.
Inflation can occur as a result of increased demand, increased costs or expectations of higher prices in the future.
In the worst case, the economy can end up in a self-reinforcing spiral of rising prices and wages from which it is very difficult to get out.
When you say that inflation is high, it is often associated with something negative because it means that the purchasing power of most people has decreased. At least if wage growth has not increased in line with the price rise.
See updated figures from the Consumer Price Index statistics.
Simply put, if you earn the same as you earned last year and inflation is, for example, four percent, that means you have less money to shop with. The goods or services you could buy for NOK 100 last year will probably cost you NOK 104 this year. Since inflation is 4 percent and you earn nothing more, it means that your purchasing power is weakened.
Source: Statistics Norway and Norges Bank
Norges Bank aims for prices to increase by a maximum of two per cent a year, this is the so-called inflation target. With the pandemic and war, inflation has risen far above the target in recent years.
For 2023, inflation ended up at 5.5 per cent. Since the pandemic broke out, prices have risen 19 per cent, and should have risen eight per cent in four years.
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More expensive bread
– The price of bread has increased far more than the average, like a number of other agricultural products, says Knudsen to Nettavisen.
The price of bread has risen 23 per cent in the past two years, and 27 per cent since January 2020.
He points to both the pandemic and the war in Ukraine as reasons for the rise in prices. The pandemic led to challenges for production, at the same time as demand increased unusually much because everyone was at home.
– Then came the war, which caused the price of raw materials and energy to rise. There are important input factors for agricultural products.
Ukraine and Russia are major producers of inputs (such as artificial fertilizers) and products such as grain.
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Gasoline
The prices of bread and petrol have developed similarly over the past two (23 per cent) and four years (27 per cent).
– It is important to remember that energy is a universal commodity that is used in almost everything, both to produce other goods and to provide services.
– Energy prices, and especially gas and electricity, increased colossally after the war broke out and Western countries boycotted Russian oil and gas, says Knudsen.
The reopening after the pandemic also caused prices to rise, as almost everyone was going to travel again, almost at the same time.
– The price of different types of energy are linked. High gas prices led to high electricity prices. This has also raised the price of oil.
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– Price and rent spiral
– Housing costs mean a lot to people’s finances. Housing costs account for 20 per cent of inflation and therefore have a large impact on inflation.
Statistics Norway makes an estimate of rent based on both paid and estimated rent. House prices are not included in inflation because housing is an investment and not a cost. Inflation should measure cost developments.
– House prices, interest and rent affect people’s finances and increase the cost of living. Many of the same forces also drive companies’ rents. When companies have to pay more for rent, they have to get it back in increased prices. It could become a kind of price and rent spiral.
Knudsen explains that housing costs also mean a lot to the private market. When it becomes more expensive for many to live, then you demand the right wages. It must be brought in through higher prices.
– House rent therefore means a lot both for inflation and the key interest rate.
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Increased wages = Increased inflation
Knudsen cites a hairdressing lesson as an example of how wage growth affects inflation.
– A very large part of the price of a hairdressing lesson is wages, as the equipment is relatively cheap.
Knudsen says that hairdressers’ wages have increased a lot and pushed up the price per hour.
– This is a natural consequence of a salary increase. Increased wages lead to increased inflation.
– From this point of view, one can think that the most effective way to reduce inflation is to reduce wage growth. At the same time, this consideration must of course be balanced against the benefits of wage growth for the employees.
Tags: Inflation Interest Price shock cent expensive bread petrol
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