Icelandic Financial Market Digest 13. júníPublisher: Íslandsbanki Research • Resp.Editor: Ingólfur Bender
Airfares and housing the main drivers of inflation in June
We project that the consumer price index (CPI) will rise by 0.3 month-on-month in June, raising headline inflation from 2.0% to 2.2%.
The medium-term inflation outlook is broadly unchanged since our last forecast. We expect inflation to remain below the Central Bank’s (CB) inflation target in coming months and approach the target by the year-end. Statistics Iceland (SI) will publish the CPI on Wednesday 27 June at 9:00 hrs.
Housing, petrol, and airfares push upwards
Three items will push the CPI upwards most in June, according to our survey: house prices, fuel prices, and airfares. We forecast that airfares will contribute most to the June increase in the CPI, rising about 10% (0.14% CPI effect), after a 9% drop in recent months. Our survey indicates that fuel prices will also rise from the previous month, by 1.82% (0.06% CPI effect).
Imputed rent, which mainly reflects developments in house prices, will rise by 0.5% (CPI effect 0.11%), according to our survey. This item has been relatively volatile in recent months, however, and is more uncertain than usual at present. House price inflation has receded noticeably from its H1/2017 peak. We project that the housing component as a whole will raise the CPI by 0.12% in June.
According to our forecast, there are few items that appear likely to lower the CPI significantly in June. We expect food prices to fall by 0.51% (-0.06% CPI effect) and housewares by 0.50% (-0.02%).
Moderate inflation in the coming term
The outlook is for domestic inflation to remain reasonably moderate over the forecast horizon, as long as the ISK does not weaken excessively. For the rest of the forecast period, we expect the exchange rate to remain close to the average seen in recent quarters. We also expect the housing market to cool over the course of the forecast horizon, although wage pressures will grow steadily.
The outlook is for inflation to remain below the CBI’s 2.5% inflation target in coming months. We forecast a 0.2% decline in the CPI in July, a 0.5% rise in August, and a 0.4% rise in September, bringing headline inflation to 2.4% in September. On average, the housing component will be the main driver of the rise in the CPI over the period, contributing about 0.13% per month. That said, the upward impact of housing on the CPI has diminished substantially since May 2017, when the housing component raised the index by an average of 0.28% per month.
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 rise in airfares in July, followed by a decline in August and September.
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