What is the cause?

It is difficult to pinpoint a single explanation for this month’s CCI increase. Presumably, household sentiment has been affected over the past few months by persistent inflation, high and rising interest rates, and uncertainty about the economy more broadly. Household sentiment plunged with the onset of the war in the Middle East earlier this year, indicating that the global news environment can also affect Icelanders’ perspective on current and future economic developments.

There were no obvious changes in the economic outlook that could explain such a sudden turn in CCI measurements. On the contrary: the Central Bank (CBI) raised the policy interest rate by 0.25 percentage points in the middle of the month, pushing it up to 8% in the third rate hike of the year. Households remain well positioned, though, and as we have discussed recently, their pessimism in recent months seems to have been out of sync with the metrics describing their situation.

Furthermore, the CCI measurement was conducted during the run-up to the plebiscite on whether or not to resume accession discussions with the European Union (EU). The discourse in Iceland therefore focused sharply on domestic politics and the campaign leading up to the referendum. It is possible that this event provided a counterweight to negative foreign news coverage, thereby shifting Icelanders' assessment of the economic outlook. As a result, the August jump could reflect a correction after the unusually downbeat measurements from the spring rather than a major change in the underlying economic situation.

All subindices turn upwards

All subindices rose MoM but, like the CCI as a whole, are still below the 100-point equilibrium line. The biggest improvement was in subindices that measure Icelanders’ assessment of the current situation and labour market. There was also an improvement in components the economy and expectations six months ahead.

The most decisive improvement was in the subindex for the employment situation, which rocketed from 53 points to 85. This is highly intriguing, given that the labour market has been cooling at a steady pace in the recent term. Unemployment is up, job numbers are down, and wages are rising more slowly than at any time since 2020, as we have discussed recently. Moreover, prospects for the winter are ambiguous; for instance, the Directorate of Labour recently forecast that registered unemployment would rise above 5% this winter. Nevertheless, even with this month’s surge, this subindex of the CCI is down 27 points year-on-year. While the numbers indicate that Icelanders have grown less downbeat about the labour market, there is plenty of pessimism around.

What does this say about private consumption?

Households’ expectations have historically given a reliable indication of where private consumption is headed. Yet in spite of the past few months’ unusually low expectations measurements, private consumption has continued to grow, albeit at a distinctly slower pace than before. For instance, it grew by 1.3% in real terms in H1/2026, down from 3% a year earlier.

The spike in sentiment this August does not change the big picture, though, as single-month measurements should always be interpreted with caution. It will be interesting to keep abreast of developments in the months ahead, not least in view of the wage agreement review that must be completed by 8 October. Íslandsbanki Research continues to forecast moderate growth in private consumption for 2026.