Is the era of low and stable inflation over in the Nordics?

14.06.2023 11 min read time

For the first time in history since the introduction of the euro, inflation in the Nordic countries is much higher than in the US, says Tomas Hildebrandt, Senior Portfolio Manager at Evli.

Throughout this millennium, the inflation rate in the Nordics has varied between one to four per cent. Denmark, Finland and Sweden have followed the general development of inflation in the euro area, where – during the existence of the euro – the average inflation rate has been half a percentage point lower than in the United States.

However, during the last couple of years, inflation has been on the rise. The figures in Finland and Denmark are roughly on the same level as in the euro area, at just over eight per cent, while inflation in Sweden has remained persistently even around the 12 per cent mark. For the first time in the history of the euro, the inflation rate in Europe and the Nordics is much higher compared to the US.

– According to optimistic estimates, inflation in the US may even decrease to only two per cent by the end of the year, to the target rate set by central banks, says Tomas Hildebrandt, Senior Portfolio Manager at Evli, a Finnish asset manager with services including mutual funds and asset management for institutional, corporate and private clients.

According to Hildebrandt, the higher inflation rate in the Nordics compared to the US is a critical factor for European central banks and the development of the exchange rate of the euro

in the long term. In theory, the value of the currency with higher inflation will decline, which will potentially lead to central banks tightening their monetary policy even further.

Inflation is, naturally, detrimental to the economy in general. The prolonged period of low and stable inflation in the Nordics is currently being put to the test.


The predictable and stable development of prices helps in planning and carrying out investments and business operations, says Tomas Hildebrandt from Evli

Current inflation due to the pandemic

For a long time, inflation rates in the Nordic countries remained at a steady level, fluctuating between two to three per cent. Compared to current figures, the previous range seems quite marginal, Hildebrandt says.

He notes that the inflation began to escalate already a couple of years ago when global logistics and subcontracting chains no longer ran smoothly because of the COVID-19 pandemic. At the same time, the price of crude oil started to rise swiftly from rock bottom to high inflation figures.


– Also, this spiral sped up due to the energy panic brought about by the war in Ukraine. In the future, inflation rates may rise further because of the increasing living costs and wages.

Luckily, at least for now, the peak level was reached at the end of last year. The prices of many commodities have decreased, and the increase in consumer prices has slowed down.

Among the Nordic countries, only Sweden remains in a league of its own with an inflation rate of around 12 per cent. The reasons for this situation are not that simple to decipher.


– Inflation is a consumer price index, a basket of commodities with varying emphasis in different countries. The differences are partly due to how they are calculated.

Compared to Continental Europe, Nordic companies have a comparative advantage because of their beneficial selection of energy sources and low electricity prices. The weakening currencies of other countries provide an advantage for export-oriented businesses.


Only certain companies suffer

In Hildebrandt’s view, a moderate inflation rate of 2–4 per cent does not necessarily cause problems for businesses because most likely their balance sheets will also improve. Even the current level of 7–8 per cent is no cause for concern. The situation becomes more serious only when the central banks begin to force inflation to decrease.

Major Nordic companies have global operations, which means that the effect of inflation in the Nordics is more limited than for those small and mid-sized businesses that operate mainly in their home market. However, inflation and especially its fluctuations interfere with the planning and building up of business operations.

– The predictable and stable development of prices certainly helps in planning and carrying out investments and business operations. And the risks are then even smaller.

According to Hildebrandt, it is up to the company itself whether an increase in production costs can be transferred to the final price. It is difficult to divide based on geography or branch of industry.

Threatened by deflation and the 70s scenario

There is currently a great deal of fluctuation in all sectors of the market and the economy, and the future development of the economy and inflation rate is difficult to predict. One of the threat scenarios involves a steep decline in inflation, all the way to deflation-level figures, as was the case after the financial crisis in 2009.


 Decreasing inflation may sound nice, but at worst, it could cause us to enter a global recession.

– Decreasing inflation may sound nice, but at worst, it could cause us to enter a global recession.

However, Hildebrandt does not consider the threat of a recession that likely – at least at this point it would not come as a surprise, and households and businesses have had a chance to prepare for it in advance.

A more threatening scenario would be a return to a long-lasting period of high inflation similar to the 1970s, which would slow down economic development and affect the finances of consumers and businesses. Many would be faced with the choice of spending on either electricity or food. Such a scenario could become a reality if energy prices begin to rise again sharply, causing cost pressure on companies and households.


– We should not delude ourselves into thinking that the energy crisis is over. Russia’s war of aggression in Ukraine is still in full force, and the price of crude oil can fluctuate dramatically.


Trust in the economy is crucial

Hildebrandt assumes that inflation in the Nordics will decrease, but not quite to the target rate of two per cent set by the central banks. In Finland and Denmark, an inflation rate of 3–4 per cent is possible, and even likely.

Ultimately, according to Hildebrandt, the development of inflation is all about psychology: how much do we trust in money retaining its value?

 If there is no trust in the economy, inflation will inevitably escalate

– If there is no trust in the economy, inflation will inevitably escalate.

A stable society and trust in the economy are factors that constrain inflation efficiently. If we manage to re-enter a growth track and the economic policy is successful, inflation is likely to decrease as well.

– There are no quick fixes for the situation. A consensus is necessary – we need different parties in society to be like-minded in their attempts to balance the economy.

Lowell Focus Nordic

Lowell Focus Nordic

Private economy