Sweden's Low-Inflation Miracle Amid Wartime Chaos

Sweden has managed to tame inflation despite the ongoing war in Iran, which has driven up prices across Europe. The country's harmonised CPI rate is a mere 0.3%, the lowest on the continent and far below the EU average of 3.8%. This remarkable drop in inflation can be attributed to the Swedish government's targeted tax relief measures.

The Scandinavian country lowered VAT on food from 12% to 6% last April, a measure set to remain in place until the end of 2027. Additionally, it has subsidised 50% of public transport costs since July and will continue to do so until the end of this year. Fuel prices also benefit from tax relief of around three Swedish kronor (27 euro cents) per litre.

Economists attribute the minimal impact of the war in Iran on Swedish prices primarily to these measures. The Riksbank estimates CPI at around 2% once energy prices and the temporary effects of these tax breaks are stripped out.

However, Swedish policymakers are not declaring victory just yet. The central bank considers it a priority to prevent that 2% figure from rising, signalling rate hikes this year 'if the outlook for inflation and economic activity remains unchanged' under pressure from energy prices.