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Icelandic Financial Market Digest 16. júní

Publisher: Íslandsbanki Research • Resp.Editor: Ingólfur Bender

We forecast a 0.2% rise in the CPI in June

We project that the consumer price index (CPI) will rise by 0.2 month-on-month in June, leaving headline inflation unchanged at 1.7%. 

The medium-term inflation outlook has improved somewhat since our last forecast. It now appears that inflation will not rise above the Central Bank’s (CBI) 2.5% inflation target until H2/2018 and that it will average less than 3.0% through end-2019. 

Housing and airfares pull upwards

Rising house prices are the main contributor to the June increase in the CPI, as they have been in the recent term. Imputed rent, which largely reflects developments in house prices, raises the CPI by 0.27%. That said, our survey indicates that the pace of housing inflation is easing. It is worth noting that house prices have raised the index by 0.35% per month, on average, in 2017 to date. 

Airfares will raise the CPI by 0.09%, following the usual seasonal pattern. In addition, we expect restaurant and accommodation prices to rise somewhat (0.03% CPI effect). 

ISK appreciation and competition push prices downwards

Various sub-components of the CPI will fall in June, not least among imported goods. This is due both to the appreciation of the ISK in recent months and to stiffening competition stemming from the entry of Costco into the local market as well as Icelanders’ growing trade with international online merchants. These factors, together with falling global petrol prices, explain the 4.3% drop in domestic petrol prices (-0.08% CPI effect). Other items whose prices are falling include motor vehicles (-0.05% CPI effect), pharmaceuticals (-0.04%), and furniture and housewares (-0.02%). We also expect telephone service prices to continue falling (-0.02% CPI effect). 

Inflation to rise modestly in the near term

The outlook is for a slight uptick in inflation over the next few months. We forecast a 0.1% decline in the CPI in July, a 0.5% rise in August, and a 0.3% rise in September, bringing headline inflation to 1.9% in September. 

On average, the housing component will be the main driver of the rise in the CPI over the period, contributing about 0.23% per month. Furthermore, seasonal sales will affect the CPI in July, as usual, as will end-of-sale effects in August and September. We also expect a seasonal spike in airfares in July, followed by a decline in August and September. 

Moderate inflation in the coming term

The outlook is for domestic inflation to remain moderate over the forecast horizon, as long as the ISK does not weaken unduly. Furthermore, the full effects of increased competition in the retail sector have yet to surface, in our opinion, and will contain inflation in the coming term. We expect inflation to remain below the CBI's target for the rest of this year, measuring 2.1% in December. The pace will probably pick up as the winter advances, however. We project that inflation will average 2.5% in 2018 and 2.8% in 2019. 

Inflation forecast for June 2017


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