The highlights

The transport category generated perhaps the most curiosity in connection with the March measurement, due to unusually pronounced uncertainty because of rising fuel prices in the Middle East. The transport category as a whole increased by 1.75% (0.27% CPI effect), owing mainly to fuel and airfares. Fuel prices rose 6% (0.15%) MoM, broadly in line with forecasts. On the other hand, airfares rose by only 3.55% (0.09%) in March, whereas we had anticipated a larger increase. As it is noted above, it is possible that airfares will rise accordingly more in April.

Food prices have risen noticeably in recent months, but this time they increased less than before. Prices were up 0.7% MoM (0.11%), driven mainly by dairy products, although the price of meat rose as well. The increase in dairy prices was expected, as the agricultural pricing committee had decided to raise the price paid to farmers. There are hopes that hikes in food prices will continue to ease in the months ahead.

Clothing and footwear prices rose by 1.2% (0.04%), owing mainly to end-of-sale effects. We had expected prices to pick up more strongly, reversing the impact of seasonal sales in full.

Real estate market at peace?

The housing category as a whole increased by 0.23% (0.07% CPI effect). Paid rent increased by 1% (0.04%), for the second month in a row, whereas imputed rent rose by only 0.13% (0.03% CPI effect). Imputed rent has ticked upwards very modestly in recent months, recording its smallest rise since January 2025. It is positive for the inflation outlook that the real estate market has calmed down and is not the key driver of inflation at present.

The inflation outlook further ahead

• April: CPI to rise 0.4% (twelve-month inflation 4.8%) – Fuel prices continue to rise. Airfares increase marginally.
• May: CPI to rise 0.25% (twelve-month inflation 4.9%) – Fuel prices rise, while airfares taper off slightly.
• May: CPI to rise 0.6% (twelve-month inflation 4.6%) – Fuel prices rise, but less strongly. Airfares and restaurant/accommodation prices rise due to seasonal fluctuations.

If our preliminary forecast materialises, headline inflation will measure 4.6% in June. This is more persistent inflation than previously anticipated, mostly because of knock-on effects from the conflict in the Middle East. The outlook is for fuel prices to rise more than we had previously forecast. SI’s most recent figures show an increase of 6% in March. Domestic prices have continued to climb since the price measurement week, however, and our calculations put the additional rise at about 5%. All else being equal, this will factor into the April CPI measurement.

Since the onset of hostilities in the Persian Gulf, the price of Brent crude has risen by over 40%, and the oil markets have been highly volatile in recent weeks. If foreign fuel prices do not retreat in the near future, prices in Iceland can be expected to push higher, causing inflation to be correspondingly more stubborn. The impact on inflation could also stem from far more causes than oil prices alone, however, as we discussed recently.

In our preliminary forecast, we assume prices will continue upwards in the near term but start to calm down as spring sets in. If this assumption is not borne out, higher fuel prices could start to spill over to other prices, including in the form of higher shipping costs, which would fan the inflationary flames that much more.

The positive note in today’s inflation figures is that underlying inflationary pressures do not seem to have grown to any marked degree. The March increase is limited to a few distinct items, which is good. The Central Bank (CBI) is in a tricky position, however. The Monetary Policy Committee (MPC) raised the policy interest rate by 0.25% last week. Opinion was divided among Committee members, however, with two of the five voting for a rate hike of 0.5%. The CBI is clearly racing against time, as the assumptions clause in wage agreements could be triggered this autumn if inflation is above 4.7% in August. As things stand now, the activation of the clause will stand on a knife’s edge if our forecast materialises. Presumably, the MPC will raise interest rates again at its meeting in May, unless the April inflation measurement is far more favourable than we have depicted in the forecast above.