You may have noticed that, at times, it suddenly became more expensive to fill your shopping basket and that many other things also cost more than they used to. At other times, prices may have seemed more stable. When prices rise broadly across the economy, this is called inflation.
Inflation measures how much consumer prices have risen. In other words, it shows how much more consumers must pay for the goods and services they buy. If inflation has been 5 per cent over one year, goods and services that cost kr. 100 a year ago will cost kr. 105 today.
When inflation is high, your money is effectively worth less because it buys fewer goods and services. In other words, inflation erodes the value of money.
High inflation is also often more volatile. When future prices become harder to predict, households and businesses find it harder to make financial decisions. This harms the economy as a whole.
Like most other countries, Denmark aims to keep inflation low and stable.
Lower inflation does not necessarily mean lower prices
When inflation falls after a period of high inflation, goods in the shopping basket do not necessarily become cheaper. This is because inflation measures changes in prices, not the price level itself.
Consider a hypothetical example. If inflation falls from 5 per cent in January to 2 per cent in November, prices in January were 5 per cent higher than in January the year before. In November, prices are only 2 per cent higher than in November the year before. However, prices are still rising.
Conversely, if goods in supermarkets and across the economy became 5 per cent cheaper than a year earlier, inflation would be minus 5 per cent. Negative inflation is also known as deflation. Deflation may cause people to postpone purchases of goods and services because they expect to buy them more cheaply later. If everyone does this, economic activity may stall.
The European Central Bank (ECB) and other central banks do not target inflation of 0 per cent because this would increase the risk of inflation turning negative.
Hyperinflation: when inflation is out of control
Many people in Denmark have experienced how sudden price increases can affect their personal finances. However, the disadvantages of inflation become even clearer in extreme cases. History provides several examples of the consequences of extremely high inflation, also known as hyperinflation.
Germany experienced hyperinflation in the 1920s. At its peak, inflation reached a staggering 300,000 per cent a year. Prices rose so much that money became unusable as a means of payment. A newspaper cost 200 billion marks, and people began using banknotes as wallpaper. When people were paid, they had to spend all their money quickly before it lost its value.
A more recent example occurred in Venezuela in 2018, when annual price increases exceeded 10,000 per cent.
How is inflation measured in Denmark?
Statistics Denmark publishes the consumer price index every month. The index shows price developments for the goods and services included in household consumption in Denmark. Statistics Denmark measures the percentage change in prices compared with the same month one year earlier.
The consumer price index is based on approximately 25,000 prices collected from around 1,800 shops, businesses and institutions across Denmark. The prices of individual goods and services are weighted in the index according to their share of average total consumption across the Danish population. Two points are important to note:
Firstly, the consumer price index measures the prices of the goods and services that people in Denmark generally buy and put in their shopping baskets. Your own basket may therefore look different.
Secondly, the index expresses an average for the goods and services in the basket. The index may therefore rise even if some prices fall, for example if the prices of other goods that carry more weight in the basket rise at the same time.
How can central banks influence inflation?
Central banks play an important role in relation to inflation because they are responsible for maintaining stable prices in the economy.
Interest rates are central banks’ main tool for influencing inflation. Central banks can change the interest rate that commercial banks receive or pay on deposits with the central bank. This affects other interest rates in the economy. By raising interest rates and making it more expensive to borrow for consumption and investment, central banks can dampen demand in the economy and thereby reduce inflation. Conversely, central banks can lower interest rates to stimulate demand.
In the euro area, the ECB seeks to keep inflation low and stable. The ECB targets inflation of 2 per cent over the medium term.
Inflation expectations also matter
When a central bank such as the ECB aims to meet an inflation target several years ahead, inflation expectations play an important role. People’s expectations of future price developments affect how they spend, borrow and invest. The ECB therefore considers inflation expectations when deciding what action is needed to maintain stable price developments.
Danmarks Nationalbank also monitors inflation expectations among people in Denmark. This helps the Bank assess how the Danish economy may develop. Every month, Danmarks Nationalbank invites 6,000 randomly selected people to take part in its expectations survey. Participation is voluntary.
How does Danmarks Nationalbank help keep inflation low and stable?
As Denmark’s central bank, one of Danmarks Nationalbank’s most important tasks is to ensure stable prices.
Denmark operates a fixed exchange rate policy. This means that Danmarks Nationalbank keeps the exchange rate of the Danish krone stable against the euro. That is why one euro always costs around kr. 7.50.
By linking the krone to the euro, Danmarks Nationalbank ensures that the price level and therefore inflation in Denmark follow those of the euro area over time. In this way, Denmark “imports” the price stability that the ECB seeks to maintain.
Since the introduction of the fixed exchange rate policy, inflation in Denmark has broadly followed inflation in the euro area
2020-24: Pandemic, Russia’s invasion of Ukraine and large fluctuations in inflation
After decades of low inflation, inflation rose sharply around 2022 following the coronavirus pandemic and Russia’s invasion of Ukraine. In Denmark, inflation rose from 0.4 per cent in October 2020 to 11.4 per cent in October 2022. A few years later, inflation had returned to more moderate levels.
Global disruptions to supply and demand pushed up inflation
When the coronavirus pandemic began in early 2020, it caused major and sudden disruptions to the economy. Widespread lockdowns around the world restricted the supply of goods and services. Many countries introduced large support packages to sustain demand and avoid an excessive economic downturn. When the lockdowns were lifted, bottlenecks emerged in global supply chains because much shipping had also been suspended during the pandemic. Strong support for demand and disruptions to supply helped inflation rise rapidly.
Another shock soon hit the economy: Russia’s invasion of Ukraine in February 2022. Before the invasion, Europe imported large quantities of gas from Russia, including for electricity generation, while both Russia and Ukraine were major food exporters. The war in Ukraine therefore quickly added to inflation, this time driven by steep increases in gas, electricity and food prices.
Higher interest rates and the normalisation of supply and demand brought inflation down again
Inflation fell almost as quickly as it had risen.
The restrictions introduced during the coronavirus pandemic had ended, support packages were gradually phased out, and bottlenecks in global supply chains were gradually resolved. Europe had found alternative sources of gas to refill its storage facilities, and energy prices had begun to fall.
Between 2022 and 2024, the ECB raised interest rates several times in response to high inflation. Because of Denmark’s fixed exchange rate policy, Danmarks Nationalbank adjusted its interest rates accordingly.
As higher interest rates dampened demand, and supply and demand gradually normalised, inflation began to fall in both Europe and Denmark.
As inflation declined, the ECB and Danmarks Nationalbank gradually lowered interest rates slightly in 2024 and 2025.
Geopolitical tensions continue to affect inflation
Geopolitical uncertainty, trade conflicts and negative shocks to energy and commodity markets caused by the war in the Middle East continue to affect the Danish and global economies. This has implications for both inflation and central bank interest rates.
Danmarks Nationalbank’s latest publications on inflation are listed below.
To learn more about how Danmarks Nationalbank expects inflation to develop, read our latest Outlook for the Danish economy.