Sweden's Inflation Divergence: Navigating Core vs. Energy Dynamics for Strategic Rate-Cut Bets

Sweden's inflation landscape in 2025 has become a textbook case of divergence. Core inflation, measured by the Riksbank's preferred CPIF (Consumer Price Index with a Fixed Interest Rate), has stubbornly remained above the central bank's 2% target, hitting 3.3% in June 2025. Meanwhile, headline inflation—driven by energy prices—has moderated to 0.8% in July 2025, masking the persistent pressures in non-energy sectors like food, housing, and services. This dislocation between core and energy-driven inflation is not just a statistical curiosity; it is a critical signal for investors positioning for the Riksbank's next moves.

The Core of the Problem: Why the Riksbank Can't Ignore It

Core inflation, which strips out volatile energy and interest rate effects, has been a thorn in the Riksbank's side. In June 2025, it surged to 3.3%, up from 2.5% in May, driven by surging food costs and slower declines in transport expenses. While housing and utilities costs fell, they were insufficient to offset the broader trend. The Riksbank's CPIF target of 2% is now 60 basis points out of reach, a gap that has persisted for six months. This divergence is alarming because core inflation reflects structural price pressures—such as wage growth and service-sector bottlenecks—that are harder to “look through” than temporary energy shocks.

Energy inflation, by contrast, has cooled. Global oil prices stabilized in Q2 2025 after a mid-year spike, and Sweden's headline inflation dropped to 0.8% in July. However, this moderation is a double-edged sword. While it eases immediate inflationary risks, it also masks the fact that core inflation remains entrenched. The Riksbank's policy framework, which prioritizes CPIF, now faces a dilemma: Should it tighten further to combat core inflation or ease to support a fragile recovery? The answer lies in the data.

The Riksbank's June 2025 Rate Cut: A Preview of Easing to Come

The Riksbank's June 2025 decision to cut the policy rate by 25 basis points to 2%—marking the seventh cut since the easing cycle began in mid-2024—was a clear signal of its preference for growth over inflation. The central bank cited a “weaker-than-expected recovery,” high unemployment, and the expectation that inflation would stabilize near its target. However, the market's reaction was mixed. The Swedish krona depreciated sharply post-announcement, reflecting skepticism about the Riksbank's ability to balance its dual mandate.

The key takeaway for investors is that the Riksbank is now in a “wait-and-see” mode. While core inflation remains elevated, the central bank is prioritizing economic stability over aggressive tightening. This creates a window for further rate cuts, particularly if energy-driven inflation continues to moderate and core inflation shows signs of peaking. Analysts at Handelsbanken and Nordea now project at least one more cut in 2025, with the next decision due in August.

Strategic Bets: Bonds, Equities, and Currencies in a Divergent Inflation Environment

Bonds: The Riksbank's easing cycle is a tailwind for Swedish government bonds. With the 10-year yield at 2.1% in July 2025, investors can lock in attractive returns as yields are expected to fall further. A laddered approach—buying bonds with staggered maturities—can hedge against potential rate volatility if core inflation surprises to the upside.

Equities: Sectors sensitive to lower borrowing costs, such as real estate and consumer discretionary, are prime targets. The OMX Stockholm 30 Index has already gained 8% since the Riksbank's June cut, with real estate firms like Skanska and Viking Property outperforming. Defensive plays in utilities and healthcare are also worth considering, as they offer resilience against core inflation.

Currencies: The Swedish krona (SEK) is under pressure from the Riksbank's dovish stance. A weaker SEK benefits exporters but hurts import-dependent sectors. Investors should consider hedging SEK exposure with Nordic equity ETFs or pairing SEK short positions with long positions in the OMX index.

The Road Ahead: Data-Dependent Policy and Investment Flexibility

The Riksbank's next move hinges on incoming data. If July CPIF inflation holds near 2.8% and core inflation peaks, the central bank may accelerate easing. Conversely, a surprise rise in CPIF to 3.0% could delay cuts. Investors should remain agile, adjusting portfolios based on monthly CPIF releases and the Riksbank's communication.

In conclusion, Sweden's inflation divergence—core inflation above target and energy-driven inflation cooling—strengthens the case for near-term rate cuts. By positioning in bonds, equities, and currencies aligned with an easing cycle, investors can capitalize on the Riksbank's pivot while managing risks from persistent core inflation. The key is to stay attuned to the data and the central bank's evolving calculus.