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CPI jumps in April, driven by steep rise in house prices and an uptick in food prices

Inflation has proven more persistent than we expected, although the outlook is for it to ease as the year progresses and align with the Central Bank’s (CBI) 2.5% target in mid-2022. House prices could put a spanner in the works in the coming term, however, as the market appears buoyant at the moment.

According to newly published figures from Statistics Iceland (SI), the CPI rose 0.7% month-on-month in April, raising headline inflation to 4.6%, from 4.3% in March. This is Iceland’s highest inflation rate since the beginning of 2013. Twelve-month inflation excluding housing also measured 4.6% during the month. In the recent past, the CPI excluding housing has risen more slowly than the simple CPI. House prices have therefore begun to push the index more strongly upwards than they did previously.

The April measurement is well above all official forecasts. We had projected that the CPI would rise 0.2% between months. The main difference between our forecast and SI’s measurement stems from the housing component, which rose much more than we had projected, owing to the vibrant housing market. Furthermore, food prices rose during the month, and furniture and housewares prices increased more than we had anticipated.

House prices the main upward-pushing item

Rising house prices have affected the CPI in recent months. The market price of housing rose nationwide by 2.7% MoM, according to SI’s measurements – the biggest jump in a single month since September 2016 This month’s rise was distributed across both the capital area and the rest of the country.

According to SI data, the pace of twelve-month house price inflation has accelerated with this month’s measurement. House prices nationwide have now risen by 10.6% year-on-year, the swiftest pace in three years. The current upswing is led by single-family home prices in the capital area, which are up by a full 16% YoY. Over the same period, capital area condominium prices have risen nearly 10% and prices in regional Iceland by nearly 8%. Prices in greater Reykjavík and those in regional Iceland have diverged more sharply in the recent past, after a period of briskly rising prices in regional Iceland in 2018-2020. We have discussed developments in capital area house prices and the outlook for the market there in a recent newsletter. This month’s measurement accords well with our opinion that it would be beneficial to boost the supply of new flats on the market insofar as is possible, so as to mitigate the risk that excess demand pressures will develop.

Imputed rent, which largely reflects developments in house prices, raised the CPI by 0.4% this month, accounting for more than half of the MoM rise in the index.

Other upward-pushing CPI components

Food and beverage prices also pushed the CPI upwards in April. The food-beverages component rose by 1.1% (0.16% CPI effect) MoM, driven largely by the hike in dairy product prices in the wake of the agricultural pricing committee’s decision to raise wholesale prices on milk and butter by a sizeable margin, in response to higher production costs. This price hike had a strong impact on the April measurement.

What took us most by surprise was the furniture and housewares component, which fell marginally in March but bounced back and then some in April, rising by 1.0% (0.06% CPI effect). Other MoM increases were in recreation and culture (0.04% CPI effect) and other goods and services (0.02%).


Inflation outlook nevertheless relatively positive

Although inflation has proven more persistent this winter and the inflation curve steeper than we had anticipated, we still expect inflation to taper off over the course of this year. According to our preliminary forecast, the CPI will rise 0.2% in May, 0.3% in June, and 0.1% in July. If these projections materialise, inflation will measure 4.0% in July, thereby returning to the upper deviation threshold of the CBI’s inflation target. According to our preliminary long-term forecast, it will fall below the 2.5% target around mid-2022.

Íbúðaverð gæti þó sett strik í reikninginn miðað við mælingu þessa dagana en töluverður hiti virðist vera á íbúðamarkaði um þessar mundir. Á móti vegur styrking krónunnar, sem við teljum líklega á seinni helmingi ársins, og mun koma til með að hjálpa til við að halda aftur af verðlaginu gangi sú spá eftir.


Bergþóra Baldursdóttir



Jón Bjarki Bentsson

Chief Economist