Headline inflation rises from 6.0% to 6.2%

Twelve-month inflation inched upwards from 6.0% to 6.2% in May, whereas we had forecast that it would remain unchanged. Nevertheless, we expect it to fall in coming quarters, although the pace will not change markedly in the months just ahead. There were two particularly surprising elements of this month’s measurement: imputed rent rose very little, and the typical May decline in airfares was not in evidence.

According to newly published figures from Statistics Iceland (SI), the CPI rose 0.58% month-on-month in May, bumping headline inflation up slightly, from 6.0% to 6.2%. Inflation according to the CPI excluding housing measured 4.2% Financial analysts’ published forecasts assumed that inflation would remain flat this month. We had projected that the CPI would rise by 0.4%, leaving headline inflation unchanged at 6.0%.

Imputed rent increased far less this month than we had expected, after having risen markedly in the months beforehand. The housing component rose by 0.64% (0.19% CPI effect), and the imputed rent subcomponent, which is derived from house prices and indexed mortgage lending rates, rose by 0.71% (0.14%). Other items – such as food and beverages, other goods and services, and furniture and housewares, etc. – each pushed the index up by 0.06%. It can be said, then that this month’s increase was broad-based, not least because imported goods prices rose somewhat more than we had anticipated.

Airfares hold steady, in defiance of forecasts

The most unexpected deviation from our forecast was in airfares, which held virtually unchanged month-on-month. We had forecast that the travel and transport component would decline by 0.8% (-0.13% CPI effect). The air transport subcomponent rose by 0.20% (0% CPI effect), whereas we had projected a decline of 6% (-0.13%).  Motor vehicle prices rose by 0.54% (0.03% CPI effect), while we had expected them to fall. However, we believe this uptick in car prices is transitory and could therefore reverse in part.

Near-term inflation outlook

The May CPI measurement was the last one compiled using the old method of calculating imputed rent. The new method will be used from June onwards. The impact of the change in methodology on near-term inflation is unclear, but we expect it to reduce inflation volatility over time. Because airfares did not rise as forecast in May, the increase in June could turn out smaller than we expect, resulting in lower inflation, all else being equal. The same is true of car prices, which have been on the decline in 2024 to date, and we therefore expect this month’s increase to be short-lived. Furthermore, prices have fallen steeply in seasonal sales thus far in 2024, and the contraction in payment card turnover suggests that summer sales will be deep as well. The main uncertainty centres on the near-term effects of the change in methodology for imputed rent calculation.

Our updated preliminary forecast is as follows:

  • June – CPI to rise 0.5% (twelve-month inflation 5.8%)
  • July – CPI to rise 0.3% (twelve-month inflation 6.1%)
  • August – CPI to rise 0.4% (twelve-month inflation 6.2%)


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Birkir Thor Björnsson