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Days grow shorter, and inflation falls

We project that the consumer price index (CPI) will rise by 0.2% month-on-month in September, lowering headline inflation from 3.2% to 3.1%.


  • We project a 0.2% rise in the CPI in September

  • Inflation to fall from 3.2% to 3.1%

  • End-of-sale effects and annual autumn price hikes push upwards

  • Airfares, petrol, and hotel accommodation pull downwards

  • Inflation set to reach Central Bank target by the year-end

  • Fairly positive near- to medium-term inflation outlook

The inflation outlook for the coming term is relatively good, owing to a slower rise in house prices, a relatively stable ISK, and expectations of moderate pay rises. We project that inflation will fall to the Central Bank’s (CBI) inflation target by the end of the year, measuring 2.4% in December. Statistics Iceland (SI) will publish the CPI for the month at 9:00 hrs. on 27 September.

End-of-sale effects have surfaced — mostly

End-of-sale effects were considerably stronger than usual in August, and we expect them to be correspondingly weaker in September. We project that clothing and footwear prices will rise by just under 3% during the month (0.12% CPI effect). We also expect furniture and housewares prices to rise by just under 2% MoM (0.09%).

Other upward-pushing items include annual price hikes for educational courses and athletic clubs, as well as the end of seasonal sales in outdoors and recreational equipment stores, which we expect to raise the CPI by 0.06%. We also anticipate a 0.3% rise in foods and beverage prices (0.04%).

Airfares fall in the fall — as usual

The most prominent downward-pulling item for this month is the travel and transport component of the CPI, which we expect to fall overall by 0.7% (-0.11% CPI effect) in September. The main determinant here is the seasonal drop in airfares, as we expect air transport to fall by nearly 6% (-0.11%). Petrol prices will fall as well, by 0.5% (-0.02%).

Apart from the travel component, the main item pulling the CPI downwards this month is hotel accommodation (-0.02% CPI effect).

Housing market hibernating?

We expect the housing component as a whole to remain virtually unchanged (0.03% CPI effect). The upward impact is limited to paid rent, which we project to rise by 0.3%.

Our measurements indicate a marginal MoM rise in house prices. On the other hand, the interest component of imputed rent, which is based on developments in mortgage interest rates, has been falling, and we expect imputed rent to remain flat MoM in September.

The supply of residential housing has been increasing steadily, and demand has eased. Many indicators imply that the residential housing market is moving towards a certain equilibrium that will presumably hold in coming months.

Target-level inflation by the year-end

The inflation outlook for the months and quarters to come is quite good. We forecast that the CPI will rise 0.2% in October, 0.1% in November, and 0.5% in December, leaving headline inflation at 2.4% by the end of the year.

We expect it to average 2.6% in 2020 and 2.8% in 2021. If our forecast is borne out, the Central Bank can be well satisfied, as a stable inflation outlook makes it much easier for the bank to mitigate cyclicality with appropriate interest rate adjustments. The main uncertainties in our forecast are the possibility of an ISK depreciation this coming winter, and the wage demands in still-pending labour market negotiations. On the other hand, developments in house prices could lead to lower inflation than we have forecast here.


Jon Bentsson

Chief economist