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Headline inflation set to remain flat in August

We expect the consumer price index (CPI) to rise by 0.2% month-on-month in August, leaving headline inflation unchanged 3.1%.

We expect the consumer price index (CPI) to rise by 0.2% month-on-month in August, leaving headline inflation unchanged 3.1%.

The outlook is for inflation to ease somewhat in coming quarters, owing to a slowdown in house price inflation and expectations of moderate wage hikes. We project that inflation will fall below the Central Bank’s (CBI) inflation target by the end of the year, measuring 2.4% in December. Statistics Iceland (SI) will publish the CPI for the month at 9:00 hrs. on 29 August.

End-of-sale effects push upwards

Summer sales have begun to wind down. The most important determinants of this month’s CPI measurement are end-of-sale effects on clothing and footwear prices, which appear set to rise by 4% MoM (0.2% CPI effect). Furniture and housewares will also rise in price, by 0.9% (-0.05%).

Other upward-pushing items are food and beverages (0.05% CPI effect) and hotel and restaurant services (0.03%).

Seasonal dip in airfares

The component pulling the CPI most strongly downwards in August is travel and transport, which we expect to fall overall by 1% (-0.15% CPI effect). We project an 8% (-0.14%) drop in the air transport item, owing to the seasonal decline in airfares. We also expect petrol prices to fall by 0.75% (-0.03%) during the month.

Housing market calm and steady

We forecast that the housing component will remain calm, rising by 0.18% (0.06%) in August. We expect imputed rent (mainly a reflection of house prices) to rise 0.15% (0.02%) and paid rent to rise 0.50% (0.02%).

According to SI figures, twelve-month house price inflation measured 3.5% in July, the lowest in over eight years and the equivalent of only 0.4% in real (CPI-adjusted) terms. Prices in regional Iceland have risen by 4.9% in the past year. In greater Reykjavik, condominium prices are up 3.5% since July 2018 and detached housing prices by only 2.4%.

The supply of residential housing has been increasing steadily, and demand has eased. This indicates that the residential housing market may be reaching a certain equilibrium that will presumably hold in coming months.

Inflation below target by the year-end?

The inflation outlook seems likely to improve in the near future. We forecast that the CPI will rise by 0.3% in September, 0.3% in October, and 0.1% in November, bringing headline inflation to 2.7% in November. End-of-sale effects will make their mark on CPI measurements in September, but on the other hand, we also expect a seasonal decline in airfares in September.

If our forecast materialises, inflation will dip below the target at the year-end, measuring 2.4%. We then expect it to measure 2.7% at the end of both 2020 and 2021. There are two main uncertainties in our forecast: a possible depreciation of the ISK and wage demands in still-outstanding labour market negotiations. On the other hand, developments in house prices could lead to lower inflation than we have forecast here.


Bergthora Baldursdottir




This report is compiled by Islandsbanki Research of Islandsbanki hf.

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