Do Geopolitical Risks Raise or Lower Inflation in Sweden?

Abstract: Using two main datasets, one annual from 1900 to 2022, and one monthly from 2012 to 2023, containing a geopolitical risk index and multiple inflationary factors for both Sweden and Denmark, we construct VAR models to estimate the effect geopolitical risk has on inflation. In our annual dataset, we find that higher geopolitical risks foreshadow higher inflation and lower economic activity in Sweden. In our monthly dataset analysis, we observe that the ongoing Ukraine conflict is exerting a dampening influence on various facets of the Swedish economic landscape. Specifically, we note a decline in consumer confidence, a dip in stock prices, and a noticeable uptick in the prices of event-specific commodities, such as wheat and natural gas. Additionally, we find that the main source of geopolitical risk-driven inflation comes from trade, where supply chain deficiencies and higher import prices lead to higher Swedish inflation. The paper gives insight into how geopolitical risk impacts inflation in a country that is not directly involved in the conflict, and which sources of inflation are dominant in times of high geopolitical risk.