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Déjà vu: Inflation back to its 2022 peak

Twelve-month inflation has risen from 9.6% to 9.9% and is thus back to its July 2022 peak. The main drivers of the uptick in January are motor vehicle prices, which have risen largely because of changes in public levies, and year-end price hikes in other public levies and tariffs. Notwithstanding this setback, inflation will indeed fall in coming months, according to our forecast.

According to newly published figures from Statistics Iceland (SI), the CPI rose 0.85% month-on-month in January, pushing headline inflation up from 9.6% to 9.9%, where it topped out last July. Twelve-month inflation according to the CPI excluding housing has kept rising and is now 8.3%. The January measurement is well above analysts’ forecasts, which lay in the 0.0-0.4% range, including our own forecast of a 0.2% MoM rise in the CPI.

Hike in car prices the main driver of inflation in January

The travel and transport component was the strongest upward-pushing CPI item during the month. It rose by 2.4% (0.37% CPI effect), reflecting a tug-of-war between higher motor vehicle prices and lower airfares. Car prices rose by 9.8% (0.52% CPI effect) MoM in January, the largest single-month increase since 2008, some 14 years ago. Most of the surge in vehicle prices is due to changes in public levies that kicked in at the turn of the year. This jump in vehicle prices is therefore the main reason for the sharp rise in the CPI in January.

The travel and transport subcomponent pulling in the opposite direction was airfares, which fell by 9.6% (-0.21%), thereby erasing half of the December increase of nearly 19%.

Also rising markedly in price were food and beverage prices, up 2% (0.30% CPI effect), mainly because the increase in the price paid to dairy farmers, previously announced by the agricultural product pricing committee, took effect in January. The price of vegetables and potatoes rose as well, by 4.4%, according to figures from SI. We expect further hikes in food prices in the near term, as importers have announced major price changes set to take effect in the next few months. Furthermore, the price of alcoholic beverages and tobacco rose by 5.5% (0.13% CPI effect).

Other upward-pushing items in January were recreation and culture, up 0.9% (0.08% CPI effect); hotels and restaurants, up 2.4% (0.11%); and other goods and services, up 1% (0.07%).

Seasonal sales provide little respite

Seasonal sales typically start in January, pushing the CPI downwards, but this time they provide cold comfort. Even so, they are the biggest sales since before the pandemic. Clothing and footwear prices fell 8.4% (-0.29%), followed by furniture and housewares, down 5.5% (-0.35%).

Housing market cooling apace

The housing component as a whole rose by 1.2% (0.37% CPI effect), owing mainly to an increase in imputed rent and home heating and electricity costs. Heat and electricity prices rose 5.5% (0.17%) because of a year-end hike in utility company tariffs. Imputed rent rose by 0.4% (0.08%), due entirely to the interest component, which rose 0.65%, whereas the market price of housing fell by 0.2%. The market price of housing, which for the most part reflects developments in housing market prices, thereby showed its first decisive decrease since May 2020. The housing market has cooled, but indexed mortgage rates are rising, which has caused imputed rent to keep climbing MoM.

The main reason for the decline in the market price of housing is the 1.4% MoM drop in the price of single-family homes in greater Reykjavík. Condominium prices in greater Reykjavík fell by 0.1%, but prices in regional Iceland rose by 0.4% between months. The year-on-year rise in house prices nationwide has therefore continued to lose pace, and now measures 18.2%.

The contribution of the housing component to headline inflation has weakened. Of the headline figure of 9.9% for January, some 3.5% is due to the housing component. Imported goods have gained ground, now accounting for 2.7% of the headline figure. Services account for close to 2.1%, and the contribution from domestic goods has continued to increase, to the current 1.6%.

Inflation looks set to fall in coming months – but how fast?

Inflation is now back to last summer’s peak. The surge in house prices has begun to abate, according to the most recent figures, and hefty hikes in motor vehicle prices – themselves due largely to changes in public levies – plus increased utilities prices have overtaken housing as this month’s key driver of twelve-month inflation. As we see it, the main uncertainty is imported inflation and how it evolves in the next few months. We think inflation is likely to fall in coming months despite this setback. According to our preliminary forecast, we expect the CPI to rise by 0.7% in February, 0.4% in March, and another 0.4% in April. If these projections materialise, inflation will measure 8.0% in April.


Bergþóra Baldursdóttir


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