Norway is facing a high inflation rate that is expected to remain elevated in 2023, according to the latest government projections. The country’s consumer price index (CPI) rose by 6.5% year-on-year in March 2023, the highest level since 1982. The main drivers of inflation were rising costs of housing, utilities, transport, and household goods.
The government has revised its budget for 2023 and plans to spend an extra 56 billion Norwegian crowns ($5.3 billion) from its sovereign wealth fund, the world’s largest, to compensate for the loss of purchasing power caused by inflation. The fund, which is worth $1.4 trillion, is financed by Norway’s oil and gas revenues and invests in global stocks, bonds, and real estate.
The government expects the fund’s cash spending to reach 372.6 billion crowns in 2023, up from 316.8 billion originally planned last October. This amounts to about 3.4% of the fund’s value, which is below the long-term target of 4%. The government aims to balance its budget over time by spending no more than the expected return of the fund.
However, some economists and politicians have warned that increasing the fiscal stimulus could worsen the inflation problem and overheat the economy. Norway’s central bank has already raised its key policy rate four times since September 2022, from a record low of zero to 1.25%, and signaled more hikes ahead. The bank’s governor said that inflation was likely to peak in early 2023 and then moderate gradually.
The bank’s inflation target is 2%, but it allows for some deviation due to temporary shocks or fluctuations. The bank expects inflation to average 5.8% in 2022 and 4.8% in 2023, before falling to 2.1% in 2024. The bank also forecasts that Norway’s economy will grow by 4.5% in 2022 and 2.9% in 2023, after contracting by 0.7% in 2021 due to the impact of the COVID-19 pandemic.
Norway’s inflation surge is partly explained by global factors, such as higher energy prices, supply chain disruptions, and strong demand recovery. However, it also reflects some domestic factors, such as a tight labor market, high wage growth, and a weak currency. Norway’s unemployment rate fell to 3.4% in February 2023, the lowest level since March 2020. The average annual wage growth was estimated at 5% in 2022 and projected at 4.5% in 2023. The Norwegian krone depreciated by about 10% against the euro and the US dollar in 2022.
Norway’s high inflation rate poses some challenges for its economy and society. It erodes the real income and savings of households, especially those with fixed incomes or debts. It reduces the competitiveness of Norwegian exporters and makes imports more expensive. It also creates uncertainty and volatility in financial markets and expectations.
However, Norway also has some advantages that could help it cope with inflation better than other countries. It has a large sovereign wealth fund that provides a buffer against external shocks and a source of long-term income. It has a flexible exchange rate that can adjust to changing market conditions and help restore external balance. It has a credible central bank that can use monetary policy to anchor inflation expectations and stabilize the economy. And it has a well-functioning social dialogue system that can facilitate wage moderation and coordination.
In conclusion, Norway’s inflation rate is expected to remain high in 2023, but moderate thereafter. The government plans to use more of its sovereign wealth fund to support the economy and offset the inflationary impact. However, this could entail some risks of overheating and fiscal imprudence. The central bank will likely continue to raise interest rates to keep inflation under control and maintain credibility. Norway’s economy will benefit from its strong fundamentals and institutions, but also face some challenges from global and domestic factors.
