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Headline inflation eases slightly, to 7.9%

Headline inflation eased slightly in October, according to data published this morning by Statistics Iceland. The main upward-pushing items in October are house prices and food, and the main downward-pushing items are airfares and hotel prices. The outlook is for inflation to move within a narrow band in coming months and then fall quickly in H1/2024.

According to newly published figures from Statistics Iceland (SI), the CPI rose 0.6% month-on-month in October, lowering headline inflation incrementally, from 8.0% to 7.9%. Twelve-month inflation excluding housing has tapered off as well, from 7.7% to 7.3%.

The October CPI measurement is slightly below our forecast. Overall, analysts’ forecasts lay in the 0.4-0.75% range, including our own projection of a 0.7% MoM rise in the CPI. The main item that took us by surprise was food and beverages, which rose considerably more in price than we had anticipated. On the other hand, airfares and hotel/restaurant prices fell.

House price inflation pushes the CPI upwards in October

The main item that pushed the CPI upwards in October was imputed rent, which rose 2.0% (0.38% CPI effect). Imputed rent is a composite measure of housing market prices plus an interest component, the latter of which is based on indexed mortgage rates. House prices rose 1.5% month-on-month in October, and the interest component rose by 0.5%.

Housing market prices have therefore risen slightly more than the house price index, which was published earlier this month and showed an increase of 1.4% MoM. The difference between the two measures is that SI includes house prices in regional Iceland, which rose by 2.5% MoM. Detached housing in the greater Reykjavík area rose by 1.4% MoM and capital area condominium prices by about 1.0%.

Year-on-year house price inflation has gained pace slightly in the past two months and currently measures 3.2%. Even so, this is a vast change from the situation in summer 2022, when house prices soared by 25% between years. House prices in regional Iceland have risen the most in the past year, or by 7.0%. Next in line are capital area condominium prices, are up 2.8% in the past year, whereas detached home prices in the capital area have fallen by 1.0% over the same period.

Breakdown of upward- and downward-pushing components

Apart from from the housing component, food and beverages have been the main catalysts of the October increase in the CPI, rising by 1.0% MoM (0.14% CPI effect). The price of lamb, which increased 7.7%, weighs heavily in this item, although dairy and fruit prices rose significantly as well.

The culture and recreation component rose by 0.95% (0.10%), owing mainly to a more than 11% jump in the price of books and a 2% increase in the price of international package tours.

Travel and transit increased marginally in price, or by 0.2% (0.02%), due to the offsetting impact of a 2.0% decline in airfares (-0.04%) and a 1.0% increase in petrol prices (0.03%). It is noteworthy that airfares should fall this month because, apart from the COVID-19 season, they have generally increased in October.

The item that lowered the CPI the most this month, apart from airfares, was hotel and restaurant services, which declined by 1.3% (-0.07% CPI effect), owing mainly to a drop in the price of accommodation.

The near-term outlook

Inflation has changed in composition after topping out early this year. Although the weight of the housing component has fallen since the turn of the year, it still accounts for the lion’s share of inflation in October, or 2.5% of the 7.9% headline figure. Second in line is services, which account for 2.3% of total inflation. Imported goods contribute less to inflation than before, or 1.7%, while domestic goods contribute 1.5%.

We project that the contributions from both the housing component and imported goods will keep contracting in the coming term, and that inflation will stem mainly from domestic goods and services.

We expect twelve-month inflation to fluctuate within a narrow range in coming months. According to our preliminary forecast, the CPI will rise 0.4% in November, 0.6% in December, and 0.4% in January. If this forecast is borne out, twelve-month inflation will measure 7.5% in January. We then expect it to fall faster after the turn of the year, when large monthly increases drop out of twelve-month measurements. According to our long-term forecast, inflation will average 5.7% in 2024 and 3.8% in 2025.

The inflation outlook remains highly uncertain. The near-term situation depends heavily on the housing market and imported inflation. Further out the forecast horizon, other uncertainties will be come into play. Of particular importance are the next wage negotiations, which are rapidly approaching.


Bergthora Baldursdottir