Norwegian Inflation Moderating but Read the Fine Print

Clothing and Furniture:

Despite headline inflation moderating, inflation remains problematic. Headline inflation declined by .7% to 2.8% for the year in Norway, mostly attributed to falling clothing and furniture prices. Almost everything else went up in price, especially housing and food.

Source: Statistics Norway – The Fine Print

Norwegian CPI Basket:

According to the CPI basket below, a typical Norwegian, grossing around 44,000 NOK ($5300) per month spends 12% of his annual earnings on furniture, clothes, and shoes – every year. That is ca. 63,000 NOK or $7,500 annually! I asked around twenty people I know quite well, earning well above the average if they spent that much on those items. Looking at me like I was crazy, they all said something to the effect of “hell no.” Witnessing Norwegian inflation, at eye level, I believe that food prices have risen much more than the reported 2% year over year. For example, the cost of our subsidized lunches, in our company cafeteria, rose from 30 to 45 NOK.

Source: Statistics Norway Table 03013 Latest “Inflation Basket.”

Perhaps we are witnessing substitution in the inflation basket, exchanging steak for hotdogs and Tommy Hilfiger for Fretex (Norwegian Salvation Army). At street level, I noticed a lot of small boutiques shutting down and others offering aggressive discounts, trying to move expired merchandise. Therefore, the true inflation story and what to do about it is not being told. Productivity improvements, getting more done with the same resources, is the ultimate way to deal with inflation: not changing out leather loafers for plastic ones.

When inflation is demand driven, a slowing economy will moderate prices. However, that is not happening in Norway except for clothing and furniture where people are perhaps choosing IKEA instead of Ekornes. Supply side inflation, where import costs rise due to currency depreciation, cannot be moderated by forcefully slowing the economy. If a German sprocket costs €4 and the EURNOK is 7.5, or 30 NOK in total, and the Norwegians start having a bad day, the NOK falling to 8.5, the sprocket priced in Euro remains the same but increases to 34 NOK. The Germans will not discount if this item has worldwide demand. That is today’s Norwegian inflation story.

Real Interest Rates Remain Negative

The usual way Central Banks deal with any type of inflation is to raise interest rates, but Norges Bank “can’t:” otherwise they risk busting the housing market. Negative real rates mean that saving is losing, making it impossible for banks to build capital through deposits. It also calls into question the integrity of the currency and its’ ability to store value over the long term. Negative interest rates combined with a cashless society calls into question the meaning of banking itself.

Source: Statistics Norway and Norges Bank

A Good Question

So ask yourself the question: “What is a Bank?” (It is a place of high trust where people would store their cash and assets for safekeeping. If that can be done on a USB or in Dropbox, then why do you need a bank in the first place?) On the lending side, if they do not have deposits to loan out, they will not make money. The little cash they do have then becomes quite costly. Hence the case for person to person lending and gold.

So What Happens Next?

Norges Bank attempts to drive the economy by the numbers. They are apprehensive about raising rates, not to tip the “house of cards,” and reluctant to lower them, calling into question the NOK’s integrity. Hence, to slow the economy down the way they see it, we can expect new taxes, especially on the property, and let unemployment run (the truth behind Norway’s low unemployment figures), checking inflation. It is time to get defensive and learn to take care of yourself. The premise that the Oil Fund can save the day is now questionable as well. People must change their thinking. Saving is no longer greedy and “hoarding” as dictated by the pervasive socialist and liberal culture, but rather smart and necessary.

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