According to newly published figures from Statistics Iceland (SI), the CPI rose 0.9% month-on-month in April, pushing headline inflation upwards from 3.8% to 4.2%. Inflation according to the CPI excluding housing has risen from 2.5% to 3.2%. On the whole, the April measurement is reasonably well in line with our forecast of an 0.8% rise in the CPI. Analysts had expected the CPI to rise by 0.6-0.8% during the month. As can be seen in the chart below, the main difference between our forecast and Statistics Iceland’s (SI) figures was imputed rent, which increased more than we had projected. Other items are in line with our forecast.
Disinflation takes a breather
Headline inflation rose in April and is now just above the upper deviation limit of the Central Bank’s (CBI) inflation target. It is the first month-on-month rise in inflation since last July. Airfares, food prices, and imputed rent are the major drivers of this month’s increase. Headline inflation is expected to start easing again as soon as next month.
Annual Eastertide price bump in airfares
Airfares typically rise around Easter, when Icelanders travel abroad in greater numbers. This year was no exception, and airfares jumped 20.4% (0.4% CPI effect), as we had forecast. We expect part of that increase to reverse as demand tapers off in May. A number of indicators imply that airfares will be lower in coming months, driven by falling global oil prices and reduced demand for travel to Iceland – particularly if fewer Americans visit Iceland because of uncertainty in the US.
Fuel, another subcomponent of travel and transit, fell by 0.22% MoM in April (-0.02%). Global oil prices have been tumbling in recent weeks and are currently at their lowest in some time. As a result, we expect petrol prices to keep falling in the months ahead.
Biggest surge in imputed rent in nearly a year
In the scant year since SI adopted its new calculation method, imputed rent has not increased by more than 1% in any given month – until now, when it surged by 1.1% (0.4% CPI effect). In the next few months, however, we expect it to rise far less, or an average of around 0.5% per month.
Food price inflation still sticky
Food prices have risen stubbornly in 2025 to date – domestic goods in particular, as various costs associated with food cultivation have increased in the recent term. We hope these home-grown price hikes will start to ease soon, although the main unknown on that score is Iceland’s unpredictable weather, which can be quite disruptive.
Inflation set to retreat again in May
Despite this month’s uptick, we expect twelve-month inflation to fall again starting in May. Our preliminary forecast is as follows:
- May – CPI to rise 0.2% (twelve-month inflation 3.8%)
- June – CPI to rise 0.4% (twelve-month inflation 3.7%)
- July – CPI to rise 0.3% (twelve-month inflation 3.5%)
If our forecast materialises, headline inflation will measure 3.5% in July, its lowest since year-end 2020. According to our long-term forecast, it will keep falling, albeit more slowly than in the recent past. The possibility of single-month spikes like the one this April cannot be ruled out, but overall, inflation will trend downwards through mid-2026, reaching about 3%. That said, we think it will be difficult to bring it back to the CBI’s 2.5% target, although it will come quite close.
If our forecast is to materialise, the ISK must hold relatively stable. It has appreciated somewhat in 2025 to date. Furthermore, wage drift must be limited if our long-term forecast is to hold, but long-term wage agreements have eliminated most of the uncertainty on that front.
The biggest uncertainty at present centres on tariffs and how they will affect Iceland. Our forecast does not assume any such impact, but as the situation grows clearer we will update our forecasts accordingly.
