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Internet shopping is causing deflation in Sweden

James PomeroyHSBC / TwitterHSBC economist James Pomeroy, one of the most interesting analysts in Europe.

Sweden’s central bank, the Riksbank, has had a negative interest rate policy since the beginning of 2015, and by rights it ought to now look like the Weimar Republic, where rampant inflation in the 1920s forced Germans to carry around their hopelessly devalued currency in wheelbarrows.

The -0.35% rate hypothetically means that if you were to borrow money the Riksbank would pay you 0.35% interest to do so. Sweden’s krona is cheap, the Riksbank is printing more of it (electronically), and in a cheap-money environment one of the first things we should be seeing is rampant inflation. When money is cheap, everyone puts their prices up.

But HSBC global economist James Pomeroy points out in a recent note to investors that the opposite is happening. The country has seen 43 consecutive months of sub-1% inflation, he says:


Pomeroy has a surprising explanation for this: The internet is fuelling deflation in Sweden. Swedes are early adopters of all things digital, and if Pomeroy is right then “internet deflation” on a nationwide scale ought to start showing up in other Western countries too. “We have long-held a view that low inflation in Sweden is the ‘Canary in the coalmine’ for the rest of the world. As a small, open, and wealthy economy, global disinflationary forces will show up in Sweden more clearly than in most countries,” he says.

The context: Sweden has strong GDP growth, growing employment rates, and — infamously — an out-of-control housing boom that may or may not be a bubble. For economists, this is all fascinating because in theory there should be crazy inflation in Sweden. But there isn’t. Pomeroy puts it this way:

Sweden has strong GDP and asset price growth and now a positive output gap that has closed very quickly over the past few years. Nominal wage growth may be slowing, but real wages are still increasing. There’s little in the activity data to suggest why prices are not rising. The currency may now be strengthening on a trade-weighted basis, but this is following a year of currency weakness … The high unemployment rate may suggest slack in the labour market, but thanks to rising participation, Sweden’s labour force is growing more quickly than most countries in the developed world, and the labour market is tightening. Low inflation is, on the face of it, hard to explain.

At Business Insider, our pet theory is that Sweden is actually seeing out-of-control inflation, just not in money prices. It’s in Sweden’s bonkers property market, where asset prices (ie houses) are rising so fast that the central bank is terrified it might be a bubble that poses systemic risk to the entire Swedish economy. The Riksbank actually wants new laws passed to force Swedes to pay down the principal on their mortgage debts instead of just making the interest payments.

But this is not Pomeroy’s immediate concern. Rather, he argues, Sweden has staved off monetary inflation via the internet, which allows the nation’s consumers to pick and choose the cheapest goods. That vicious downward price competition has led to Sweden importing lower prices from cheaper foreign countries. Sweden is literally internet-shopping its way into deflation, Pomeroy says:

… The second factor is domestic competition, thanks to the internet. We continue to believe that the impact of technology on inflation cannot be understated, especially in wealthy, highly technology dependent countries, such as Sweden. We see the impact via many channels (chart 10) but most notably the notion that consumers are better informed on pricing, meaning that competition is increased sharply. This is before we even consider the lower costs associated with firms selling online, and the subsequent deflationary pressures. Sweden’s early wide adoption of the internet (see red bars in chart below) means that spending habits and internet usage will be more engrained than in other countries. So while the rise of the internet will be putting downward pressure on inflation in most countries, it’s likely to be even more pronounced in Sweden.

Here’s a chart illustrating the theory:


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