Details

Icelandic Financial Market Digest 06. desember

Publisher: Íslandsbanki Research • Resp.Editor: Ingólfur Bender

We forecast a 0.5% CPI rise in December

We project that the consumer price index (CPI) will rise by 0.5% month-on-month in December,  raising headline inflation from 3.3% to 3.5%.  The short-term inflation outlook has changed marginally since our last forecast.  The outlook is for inflation to measure 3.5% at the end of Q1/2019 and average 3.5% in 2019 before falling slightly, to an average of 3.2% in 2020. Statistics Iceland (SI) will publish the December CPI at 9:00 hrs. on 20 December.

Seasonal spike in airfares

We expect airfares to rise by 24% (0.33% CPI effect) in December, in line with the usual pattern, and then subside again in the months to follow. The travel and transport component as a whole will raise the CPI by 0.29%, according to our forecast, with the surge in airfares offset mainly by a decline in fuel prices, which we project to lower the index by 0.11%. The slide in fuel prices stems from the decline in global oil prices since early October.
 
Apart from the travel and transport component, imputed rent will presumably be the strongest upward-pushing component, raising the CPI by 0.04% in December, although our survey indicates that imputed rent itself will rise by only 0.20%, far below the past few months’ average. The housing component as a whole will raise the CPI by 0.09%, according to our forecast, with paid rent and home maintenance also rising in December.  Another upward-pushing component is food and beverages, which will rise by 0.40%, according to our forecast (0.05% CPI effect). We also expect an increase in the price of various imported goods, such as drugs and medicinal products (0.03% CPI effect), motor vehicles (0.02%), and furniture and housewares (0.02%).

Inflation peaks in 2019

The outlook is for inflation to remain roughly at the current level in the next few months. We project that the CPI will fall by 0.2% in January and then rise by 0.6% and 0.4%, respectively, in February and March, bringing headline inflation to 3.2% by March. As always, January will feature the customary bout of arm wrestling between seasonal sales, on the one hand, and annual hikes in utilities costs, unit levies such as petrol taxes and alcoholic beverage taxes, and various price lists, on the other. In February, the effects of winter sales will subside, with the associated upward pressure on the CPI.

Thereafter, we expect inflation to pick up over the course of 2019, peaking at 3.7% around mid-year, and then taper off steadily, reaching roughly 3.0% by end-2020. According to this, it will remain just inside the 4% upper deviation threshold of the Central Bank’s inflation target, although a return to the 2.5% target will apparently take a while longer.

The upcoming wage settlements are one of the principal uncertainties in the forecast. We have adjusted our projection of next year’s wage rises upwards, as it is clear that the uncertainty in this regard is concentrated on the upside.

Inflation forecast for December

Market

Domestic financial market news and key statistics can be found on Keldan.is webpage.

View market
Netspjall