Fuel prices up – airfares down

Transport is the CPI category that had the most impact on measurements in September, even though the category as a whole moved the index very little (-0.04% CPI effect), owing to divergent developments in its two largest subcomponents. The price of fuel rose 16.5% MoM (0.43% CPI effect) and therefore pushed the index upwards more strongly more than any other item.

The main reason for that increase was the expiry of a temporary Government measure that lowered the value-added tax rate on fuel from 24% to 11%. The rise in VAT following its expiry is estimated to have pushed fuel prices upwards by around 12%. In addition, global oil prices have shot upwards in recent weeks. This month’s surge is in line with our forecast of a 16.2% increase in fuel prices (0.43%).

The fuel price spike was offset by the seasonal drop in airfares, which fell 10.8% MoM (-0.36%) and therefore had the strongest downward impact on the CPI of any single item. Even so, the decline was considerably smaller than the nearly 15% we had projected, and smaller than the September 2025 decline of 14% between months.

In a noteworthy development, motor vehicle prices fell by 1.5% MoM (-0.06% CPI effect), the third straight monthly drop. Car prices jumped 13.3% in January 2026, owing to changes in vehicle-related public levies, and now a third of that increase has evaporated.

Slower rise in imputed rent?

The housing component rose by 0.3% in September (0.10% CPI effect), and imputed rent rose likewise by 0.3% between months (0.07% CPI effect), which is less than the 0.5% increase we had anticipated. It is also the smallest MoM rise in imputed rent since March, and far below the August increase of 0.9%. Paid rent rose as well, by 0.7% MoM (0.03% CPI effect).

Forecasting developments in imputed rent has been notoriously difficult since Statistics Iceland (SI) changed its calculation method in summer 2024, and it is too soon to draw any conclusions about whether this month’s relatively small rise marks the beginning of a more relaxed tempo. The real estate market has cooled and real house prices have fallen in the recent term, although rent prices have been more resilient.

Healthcare visits, end-of-sale effects, and household appliances

The health category of the CPI rose by 1.4% MoM (0.06% CPI effect), slightly less than we had assumed. The fee for outpatient healthcare centre visits doubled at the start of September, and the subcomponent labelled “other outpatient care services” shot up 4.7% as a result (0.05% CPI effect). Changes in fees for visits to physiotherapists, speech therapists, and occupational therapists will not affect the index until October, and we expect the health category of the CPI to keep climbing next month as a result.

The end of summer sales had the usual impact on the index. Clothing and footwear prices rose 1.1% (0.04%), after dropping by 4.7% in July and rebounding by 2.8% in August. As these numbers show, the discounts have not reversed in full, and clothing and footwear prices are still about 1% lower than they were in June, before the sales began.

The furnishings, household equipment, and routine household maintenance item rose by 2.3% (0.09%), owing mainly to the price of appliances, which jumped by 10.6% MoM after falling 6.8% in August, and is therefore 1% higher than in June.

Food and beverages rose in price by 0.4% MoM (0.06%), whereas the price of accommodation fell by 7.2% (-0.06%), reflecting the end of the peak tourist season.

Composition of inflation

Of this month’s 5.9% inflation rate, the housing component is the largest single driver, accounting for just over 1.6%. Its contribution shrank marginally between months, as imputed rent rose far less this month than in September 2025, when it jumped 0.9%. Price hikes can be found elsewhere than in the housing component, however, given that the CPIXH increased by 5.7%. The second-largest contributor to the September rise in the CPI is public services, at just over 1.3%. The per-kilometre charge for motor vehicle use, adopted at the turn of the year, still makes a marked impact, and now it is compounded by higher fees for outpatient healthcare services. The effects of these fee hikes have not surfaced in full, however, as the increase in fees for visits to physiotherapists, speech therapists, and occupational therapists will not show in the CPI until October. Other services account for 1.0% of inflation, and the contribution from tourism, at 0.8%, has shrunk due to the seasonal reduction in airfares and accommodation services. Services, including housing, therefore explain about 83% of total inflation.

The big news in the composition of inflation, however, is that the contribution from imported goods has made an about-face. Imported goods now push headline inflation upwards by 0.1%, after having lowered it each month since the turn of the year, including a 0.3% negative contribution in August. This month’s spike in fuel prices weighs heaviest in the turnaround. The negative contribution earlier in the year was due largely to the cancellation of petrol and diesel fees and the adoption of the per-kilometre charge at the start of 2026. With that change, the new fees were classified under public services, whereas the old fuel taxes had been included in the price of imported goods. Domestic goods explain about 0.6% of the headline inflation rate, and goods in mixed categories account for another 0.3%. Goods therefore account for a combined 17% of total inflation.

The inflation outlook further ahead

• October: CPI to increase 0.3% (twelve-month inflation 5.7%) – the health category will rise again when the hike in fees for visits to physiotherapists, speech therapists, and occupational therapists shows in the index. Petrol and diesel prices keep climbing.
• November: CPI to fall 0.4% (twelve-month inflation 5.8%) – Singles Day will fall during the price measurement week; airfares decline. Even though the CPI is set to fall in November, headline inflation will inch upwards, as the unusually favourable November 2025 measurement will drop out of the twelve-month comparison.
• December: CPI to rise 0.85% (twelve-month inflation 5.5%) – the effects of special discount days reverse for the most part, and the seasonal spike in airfares pushes inflation upwards.

Therefore, our preliminary forecast indicates that inflation will remain stubborn through the year-end. The twelve-month rise in SI’s core indices lost pace slightly between months, suggesting that underlying inflationary pressures are not growing. In other words, the currently elevated inflation rate is due largely to temporary factors.

The inflation outlook in the years ahead

Íslandsbanki Research’s new macroeconomic forecast, published on 29 September, can be found here. We assume that inflation will subside fairly quickly in 2027 and hold close to the 4% upper deviation threshold of the Central Bank’s target for most of that year. It will not realign with the target during the forecast horizon, although it will approach 3% at the end of 2028.

In order for inflation to subside, the rise in services prices, its main driver, will have to give way. The increased slack in the economy and more modest wage increases should contribute to such an outcome. The inflation risk profile is tilted to the upside, however. The chief risks are the Persian Gulf war and oil prices, as well as the risk of labour market disputes and a weaker ISK. On the other hand, tight monetary policy could cool the economy more than is assumed in the forecast, prompting more rapid disinflation.