Deflation | Hypo predicted a rare phenomenon in Finland – economists give two reasons why it won’t happen

in Finland not even a momentary drop in consumer prices, i.e. deflation, is likely to happen this year, according to economic forecasters competing with the Finnish Mortgage Association (Hypo).

Hypo swam in its financial review published on Fridaythat the Finnish economy may drift into momentary deflation in the middle of this year, which is not reflected in the statistics.

This so-called hidden deflation comes to the fore when the effect of loan interest is removed from the national consumer price index.

According to Statistics Finland’s most recent data, inflation without the effect of mortgage and consumer credit interest rates was only 0.1 percent in May, i.e. very close to deflation.

Hypo estimates that inflation may temporarily go negative in the fall, when the inflation-increasing effect of interest rates dissipates during the summer.

HS asked the economists of Nordea and the OP group whether we will see hidden deflation in Finland in the fall.

“Most likely we won’t see,” says Nordea’s economist specializing in the Finnish economy Juho Kostiainen.

“No, I can’t see,” also answers the OP group’s chief economist Reijo Heiskanen.

Economists who disagree with Hypo’s forecast justify both estimates with two factors that accelerate inflation: value added tax increases and the correction of electricity price statistics.

The VAT increase decided by the government earlier this year will take effect in September. The general value added tax rate will rise by 1.5 percentage points to 25.5 percent.

The fall inflation figures are also affected by the correction made by Statistics Finland to the electricity price index. Due to a statistical error, Statistics Finland corrected the electricity price index downwards in September of last year regarding the data for August 2023.

The correction will affect the consumer price index until July of the current year, after which it will automatically increase the inflation figures. The correction has thus reduced the inflation figures for the days of the year.

Reijo Heiskanen. Picture: Pete Aarre-Ahtio / IS

“Then, when we get to autumn, inflation will jump. When you take into account the effect of the VAT increase and electricity metering, it’s not worth talking about deflation,” says Heiskanen.

Nordic Kostiainen estimates that the decrease in loan interest rates may further weigh on inflation, but the inflationary effects of the increase in value added tax and the correction of the electricity price index exceed the effect of lowering interest rates.

Nordea estimates that the effect of the electricity price index correction will increase inflation by 1.5 percentage points. According to the bank’s estimate, the effect of the value-added increase on inflation is 0.7 percentage points.

“These two factors increase inflation already by a good second percentage point. That’s why inflation should be really low so that we would see negative numbers,” Kostiainen says.

Deflation is a rather rare phenomenon, but it occurs especially during economic downturns. The last time Finland’s inflation was negative was during the corona spring in 2020 and before that in 2015, when oil prices fell sharply.

Deflation is considered harmful in terms of economic growth, because when prices fall, consumers tend to postpone their purchases to the future. Then the market for apartments, cars and other consumer durables in particular may freeze.