Norwegian and international media have daily headlines about inflation and stock market crashes. If you want, you can keep up-to-date at any time on how high inflation is in Norway and our neighboring countries – or in New Zealand. If you delve a little deeper, terms such as core inflation and recession also appear. But what do these words really mean? Should you panic when you read headlines about increased inflation in Sweden and a stock market crash in the USA? Espen Sirnes is an associate professor at the School of Business at UiT Norway’s Arctic University. This is how he explains the economic terms that are often used in the news: Associate Professor at the School of Business at UiT Norway’s Arctic, Espen Sirnes, believes that we can tolerate a bit of high inflation. But hope the central bank keeps it under control. Photo: August Hansen / news Inflation Simply explained, inflation is when the prices of goods and services rise. Until 1970, a krone ice cream actually cost one krone, but today it is considerably more expensive. The price of goods and services increases – almost without exception – every year. But since our wages are also rising, we may not notice it so much. But inflation goes on and on. The Central Bank of Norway (Norges Bank) aims for inflation to be 2 per cent, i.e. for the price of goods and services to become 2 per cent more expensive over the course of a year. – What is dangerous is if the central banks lose control over inflation. Central banks are constantly fighting a battle to keep inflation under control. Then you can end up with a thousand Swedish kroner hardly worth anything, because one liter of milk costs NOK 2,000. In the past you could buy krone ice cream for one krone, but due to inflation it is considerably more expensive today. To keep inflation – or price growth – under control, the central bank can set the key interest rate. Those who have loans from the bank then have to pay more in monthly installments. That will mean less money left to buy milk in the shop or fill up the tank with fuel. This in turn makes it more difficult for shops or petrol stations to raise prices. As a result, price growth – or inflation – will slow down or stop. The authorities can also increase taxes. Then most people will get worse advice, and probably spend less money. Another measure is to increase production. If there is a large surplus of an item, it will be difficult for the store or the manufacturers to sell it at a high price. But it is not necessarily done overnight. Inflation is thus controlled by the “magical” forces of supply and demand: How much we want of a product, what we are willing to pay for it, how much is for sale and at what price it is sold. But should the warning lights be on if we see that inflation is sky high in Sweden or Finland? – It is a sign that the central banks are unable to fight inflation, and may mean that the danger of high inflation in Norway is increasing. This will again mean that we must end up with a higher interest rate or have a high interest rate for a longer period of time. Core inflation The central bank usually sets the key interest rate according to core inflation, and not general inflation. Core inflation works in the same way as normal inflation, but the price increase of certain goods is removed from the calculation. For example, energy prices and tax increases. This is because the price of energy can rise regardless of demand and supply in Norway. – The idea then is that the central bank should not make changes based on things that are not due to Norwegian conditions. Therefore, the central bank usually sets the interest rate according to core inflation, and not the normal inflation. But high energy prices can mean that companies have to raise the prices of the goods they sell, which in turn will affect core inflation. Recession Recession is when overall production or income in a country falls. For example, if the bakers bake and sell less bread, or if the citizens receive less in wages. – A common definition is when production falls for two quarters in a row. Then we have a recession. For those who sat in the front row that month the economics chapter was reviewed in the social studies book: Decline in Norway’s gross domestic product (GDP). If inflation becomes very high, your money will be worth less. Now it is 6.5 per cent in Norway. Photo: Gorm Kallestad / NTB scanpix Policy interest rate and triple raising The policy interest rate is adjusted by Norges Bank several times a year, and affects interest rates in the banks. A high interest rate usually results in a higher interest rate on the mortgage you have or a car loan you are thinking of taking out. A typical interest rate jump is 0.25 percentage points. When talking about a triple interest rate jump, it will mean 0.75 percentage points. It may sound like small numbers, but let’s do a simplified calculation that may apply to your finances. You have a home loan of NOK 5 million with a repayment period of 30 years, and your interest rate is 1 percent. You will then pay approximately NOK 50,000 in interest each year. If the interest rate is raised to 1.25 per cent, you pay NOK 62,496 each year. If there is a triple increase, i.e. 1.75 per cent, you pay NOK 87,504 – i.e. almost NOK 40,000 more a year, or just over NOK 3,000 a month. So then it is natural that you put less bread and milk in the shopping basket. During the financial crisis, the key interest rate was set to prevent major inflation. Photo: Graphics: Morten Nyutstumo / news Stock market crash and negative spiral But is there reason to panic when you read about the stock market crash in the USA? – The stock markets go up and down. A drop in the stock market on one day usually recovers in the following days. Then the common man should not do anything. – But if the fall in the stock market persists over time, there is more cause for concern. So it probably makes more sense to worry about inflation in the Nordics than a stock market crash in the US, at least in the short term. But inflation is a good indicator of which direction the arrows on the stock exchange will point. But can you and I affect inflation? Yes actually. Or, at least indirectly. That’s because inflation is affected by what we think it will be next year. If we believe that the prices of milk and bread will be higher next year, we will of course have more wages so that we do not have to reduce purchases. But higher wages for the workers make it more expensive for the companies. Then they like to raise the prices, and what happens then? Increased inflation. – It becomes a kind of negative spiral.
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This is how supply and demand control inflation, recession and interest rate jumps – news Troms and Finnmark
