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Headline inflation hits decade-high 6.2%

The CPI rose by 1.6% month-on-month in February, pushing headline inflation up to 6.2%, its highest in nearly a decade. The outlook is for inflation not to subside to any marked degree until next year.

According to figures released recently by Statistics Iceland (SI), the consumer price index (CPI) rose 1.16% month-on-month in February,  and twelve-month inflation now measures 6.2%, up from 5.7% in January. This is the highest inflation measurement Iceland has seen since April 2012, nearly a decade ago. The CPI excluding housing rose by 1.26% during the month, and twelve-month inflation thus measured was 4.2%. The two measurements have drawn closer to one another, and the latter shows that inflationary pressures are widespread at the moment.

The February measurement is high relative to published forecasts.  We had projected a MoM increase of 0.9%, whereas forecasts as a whole provided for CPI rises in the 0.8-1.2% range.  The difference between our forecast and SI’s measurements lies partly in the price of furniture and housewares, which rose more far more than we had anticipated, and the price of recreation and culture, which also exceeded our expectations.  Furthermore, items such as housing, health, and hotel and restaurant services rose more than we expected, while airfares fell noticeably.

House prices still rising rapidly

In keeping with the recent pattern, the housing component weighed heavily in the February rise in the CBI. But in a departure from the recent trend, it did not stand out from the crowd, and the MoM rise in the housing component was below the average increase measured by SI. The component as a whole rose by 0.8% (0.27% CPI effect).  The main contributor was a 1.2% increase in imputed rent, which is driven largely by developments in house prices.

Actually, the difference between the monthly change in house prices and imputed rent is unusually large this month. This is because the interest component of imputed rent, which is based on developments in indexed mortgage rates, appears to have had a slight downward impact, which it has not done recent months.  House prices rose by 1.5% MoM, according to SI data. The price of capital area condominiums rose the most (1.7%), while prices in regional Iceland rose the least (1.3%). Single-family home prices in greater Reykjavík rose 1.4% MoM.

House prices nationwide have risen by 17.9% in the past twelve months,  the fastest pace by this measurement since Q4/2017. The largest increase by this measurement has been in the price of single-family homes in greater Reykjavík (20.0%). Condominium prices in the capital area have risen more than 18.6% over the same period, and prices in regional Iceland are up 15%. As these numbers show, inflationary pressures are not letting up, although it should be borne in mind that the data are published with a one-month lag.

But the component that took us most by surprise was furniture and housewares, which jumped 7.5% MoM (0.47% CPI effect), whereas we had expected an end-of-sale hike of just over 3%. Furniture and housewares prices typically rise in February as post-holiday sales draw to a close, but this month’s increase is the largest in five years. It is difficult to pinpoint whether the surge is due primarily to an earlier-than-usual end of winter sales, or whether new goods are priced far higher than than the old inventory before it went on sale. But it appears that the latter factor explains at least part of this month’s hefty increase, as goods in this category fell in price by only 4% in the months beforehand.

The main component affected by seasonal sales – clothing and footwear – developed very differently, however, with prices rising by only 2.0% MoM (0.07% CPI effect), after falling nearly 8% in January. It is likely that this year’s end-of-sale effects on the clothing and footwear component will be strongest in SI’s March measurement.

Other items that pushed the CPI upwards in February include the following:

  • Recreation and culture rose by 1.2% (0.12% CPI effect).
  • Food and beverages rose in price by 0.8% (0.11%).
  • Fuel prices rose 3.6% (0.11%).
  • Hotels and restaurants raised their prices by 0.9% (0.04%).
  • Other goods and services rose in price by 0.6% (0.04%).
  • The health component rose by 0.7% (0.03%).

There were two components that fell somewhat:

  • Airfares were down 8.3% (-0.13%).
  • Telephone services fell in price by 2.8% (-0.03%).

Continued high inflation on the horizon

Inflationary pressures are relatively widespread at present, although the housing component and imported goods are the main drivers of the rise in the CPI and will presumably remain so in the near future. The outlook is for inflation to remain high and not subside to any marked degree until next year. According to our preliminary forecast, the CPI will rise by 0.5% in March, 0.4% in April, and another 0.4% in May. If these projections materialise, inflation will measure 5.9% in May.


Jón Bjarki Bentsson

Chief economist