In the last year, the price of food has gone up by 13 per cent, but wages have not followed suit. The interest rate has increased and the Norwegian krone has fallen. It’s starting to get really tight in the wallet – even on holiday in the south. All of this is connected. But before we start to find out what one means for the other, we need to get a couple of terms in place. We can put it like this really briefly: CONSUMER PRICE is the price level of the goods and services we buy. INFLATION is increased prices over time. MANAGEMENT RATE affects the interest we get on the savings account or pay on the loan. And now that we have these in place, we can really just jump in. We want inflation, but not too quickly What is happening in Norway right now is that the price we pay for goods and services has increased more than is good. In other words, there is high inflation because consumer prices have risen. But inflation has been higher than planned. Because yes, inflation is actually a planned thing. The government has set a target for prices to increase by approximately 2 per cent each year. That’s what Cecilie Tvetenstrand, savings and consumer economist at Storebrand, says. – If prices increase less, it may indicate bad times and high unemployment. Savings and consumer economist Cecilie Tvetenstrand at Storebrand explains why too much inflation is not good. Photo: Lise Eide Risanger / Storebrand If we as consumers do not shop enough, there will be no need for all companies to employ the same number of people. – But if prices increase more, as they do now, it can also be negative. Because then we will demand higher wages to continue being able to afford the same as before. But what does it really do that the prices are high, when we can afford it? – At some point, more people will struggle if prices continue to rise without wages increasing as much. – If price growth continues, it will mean that over time we will not be able to afford to buy goods and services as before, companies will go bankrupt and more people will lose their jobs, says Tvetenstrand. This target of a 2 per cent price increase (or inflation target, if you like) has been set by the government so that there will be predictability in the market. The companies must be able to count on stable income and expenses, so that they can plan new projects and keep their employees in work. They should know that they can sell products and services for a little more than last year, and consumers like you and me should be able to expect things to be a little more expensive. The plan is for everyone to grow slowly and in step with each other. Because when the food, the hairdresser or the car mechanic has become 2 per cent higher, you should also get a 2 per cent higher salary so that you can afford the change. And like that, wages and prices will only grow together ad infinitum. But if we are to constantly grow in step with each other, what is the point of raising the prices at all? – It is very difficult to keep inflation at 0 per cent, says Tvetenstrand. She says that society is constantly changing and that development is important. – In order to avoid a downturn in the economy, a target that is slightly higher has been chosen. This means that the inflation target is at the right distance from falling prices, and low enough that it will not result in too high a rise in prices. If we don’t have inflation, this can cause things to come to a standstill. A little inflation is therefore good for the economy. The most important thing is the predictability that this provides, it makes it easier to make financial decisions both for companies and private individuals. Sky-high key interest rate, but lower than in other countries This steady growth of 2 per cent, which the government has set as a target, is a long way from what is happening today. The consumer price has risen by 6.4 per cent in the past year, while wages are estimated to increase by approximately 5.2. In an attempt to put an end to the price increase, Norges Bank has increased the key interest rate to 4 per cent. It has not been this high since 2008. – The key interest rate is a way Norges Bank can give gas or slow down inflation, says Tvetenstrand. Policy rate in percent The policy rate is set eight times a year by Norges Bank. The policy interest rate governs the interest rates in the banks, and affects your housing costs. The aim of raising the interest rate is for the high prices to come down again. The forecast tells us how Norges Bank thinks interest rates will develop in the future. Read more about sources and reservations here. A higher policy rate means increased expenses if you have a mortgage 2021 2022 2023 2024 2025 2026 Forecast Norges bank When the policy rate is high, it means that everyone who has a loan with a floating interest rate will suddenly have to pay quite a bit more for their loan. Then suddenly there is less money left over to shop for. – Now we don’t understand why the prices continue to rise so much, but it is probably that many had saved a lot of money during the pandemic, so they have had a little extra in their account, says Tvetenstrand. – But now those accounts are probably starting to be empty, so then the price will have to come down again. And then the interest rate can also be lowered. Why do I get less interest on a savings account than the bank charges in interest on loans? The reason why you get interest on the money you deposit in the bank is that you are in effect lending your money to the bank. The bank pays you for this, in the same way that you pay the bank to get a loan when you buy a house, car, etc. The interest rate can vary quite a lot from bank to bank. Regardless of the bank, the interest rate is generally higher when you borrow money from the bank than when the bank borrows money from you. It is because it is a greater risk for the bank to lend money to you and me than it is for us to lend money to the bank. – In addition, the bank has to pay more for part of the money that is lent, as the banks also have to borrow money, in order to lend it on to us, says Cecilie Tvetenstrand in Storebrand. – There is a lower risk on a home loan than there is on a consumer loan, therefore there is also a lower interest rate. Also read: Customers lose out on the banks’ interest rate party One of the things that has contributed to prices being so high – is high import prices. Everything we buy from abroad has become much more expensive because the Norwegian krone has been close to a record low. This means that we have to pay more than before for products and services that are bought in countries that use currencies other than the Norwegian krone. – That is what is the biggest challenge for Norges Bank now. Bringing down price growth at the same time that the krone drives and creates mischief. There are many things that affect the value of the Norwegian krone, but one of the things Norges Bank can do to strengthen the krone exchange rate is to raise the key interest rate. Then all those who invest in the Norwegian krone get a greater return for their money. So why hasn’t the value of the krone recovered properly, when our key interest rate is higher than it has been for years? – While we have raised the key interest rate to bring down inflation, the other countries have increased faster and more, says Tvetenstrand. – And because it is more common to have fixed interest rates on mortgages in other countries, those who already have mortgages notice less about the higher policy rate than those with floating interest rates do in Norway. In other words: even if the policy rate is high, it is not high enough compared to the rest of the world. So even with a high policy rate, it is still expensive for companies to trade from abroad. Both car parts, avocados and mobile phones. And it is expensive for you and me to shop in the shops here in Norway. Tvetenstrand hopes the key interest rate will eventually strengthen the Norwegian krone. – I wish we had better time and could take things more calmly with the key interest rate, but it is urgent to bring down inflation. – Higher interest rates contribute both to our consumption going down and to the strengthening of the Norwegian krone. Then we reduce the import cost of products, and products become cheaper.
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Inflation for dummies – news Nordland
