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Icelandic Financial Market Digest 13. júlí

Publisher: Íslandsbanki Research • Resp.Editor: Ingólfur Bender

We forecast an unchanged CPI in July

We forecast that the consumer price index (CPI) will remain unchanged month-on-month in July, raising headline inflation from 1.5% to 1.9%.

The medium-term inflation outlook has deteriorated somewhat since our last forecast due to a change in our assumption for the ISK. Inflation now appears set to overtake the Central Bank‘s (CBI) 2.5% inflation target at around year-end and then remain close to 3.0% throughout 2019.

Housing, airfares, and petrol push upwards

Rising house prices are the main upward-pushing item in July, as they have been in the recent past. Imputed rent, which is mainly a reflection of developments in house prices, will raise the CPI by 0.26%; however, our survey indicates that the rise in residential property prices will ease somewhat. The housing component as a whole will raise the CPI by 0.3% in July. 

Airfares will raise the CPI by 0.21%, owing to seasonal factors. Fuel prices have risen somewhat in the recent term, mostly driven by the depreciation of the ISK (0.05% CPI effect).

Seasonal sales pull downwards

Summer sales are in full swing and have a strong effect on our forecast for July. We expect declines in clothing and footwear prices to lower the CPI by 0.54%, with reduced furniture and housewares prices lowering it by another 0.06%. Furthermore, we expect a reduction in pharmaceuticals prices to lower the index by 0.04% during the month. 

Other components will have less of an impact but will raise the index by just under 0.1% combined in July.

Inflation broadly stable in the near term

The outlook is for inflation to hold relatively steady in coming months. We expect the CPI to rise 0.5% in August, 0.4% in September, and 0.2% in October, bringing headline inflation to 2.1% in October.

The housing component will be the strongest driver of the rise in the CPI over the period, contributing an average of 0.21% per month. End-of-sale effects will make their mark on CPI measurements for August and September, and we expect a seasonal drop in airfares during the same two months. 

Inflation to pick up speed in the coming term

The outlook is for relatively modest inflation over the forecast horizon, provided that the ISK does not soften unduly. That said, the ISK has behaved quite differently in the past few weeks than we had expected, and our exchange rate assumptions are now more cautious as regards further appreciation during the forecast horizon. This has a moderate upward impact on our inflation forecast for coming quarters. On the other hand, the effects of increased competition in the market have yet to emerge in full and should contain inflation in the near future. 

We project that inflation will remain below the CBI‘s target until late this year and rise to 2.6% in December. However, as the forecast horizon progresses, it will pick up somewhat, averaging about 3.0% in 2018 and 2.9% in 2019.

Inflation forecast for July

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