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Headline inflation set to rise slightly in September

Inflation will inch upwards in September, according to our forecast, reflecting a tug-of-war between the end of seasonal sales, on the one hand, and lower airfares, on the other. House price increases also weigh heavily this month. The outlook is for inflation to taper off slowly in coming months and then fall more quickly in early 2024.

We project that the consumer price index (CPI) will rise by 0.4% month-on-month in September, pushing headline inflation up from 7.7% to 7.9%. According to our forecast, inflation will ease in coming months – gradually at first and then more rapidly after the turn of the year.

September’s inflation figures will reflect the offsetting impact of the end of seasonal sales, on the one hand, and lower airfares, on the other. The seasonal decline in airfares is shallower than usual for September, mainly because of higher fuel prices, which also push the CPI upwards. House price increase will also weigh heavily this month. Statistics Iceland (SI) will publish the CPI for the month on 28 September.

Housing market still fluctuating

The capital area house price rose by 0.7% MoM in August, according to data published late yesterday by the Housing and Construction Authority (HMS). Condominium prices rose by 0.9%, although single-family home prices declined by 0.2%.

Statistics Iceland measures house prices based on a methodology similar to that used by the HMS but includes regional Iceland as well. There is a reasonably strong correlation between the two measures, as the chart below indicates. Last month’s house price index value therefore gives a reasonably accurate indication of house prices in SI’s September measurement.

We forecast that imputed rent will increase by 1.1% MoM (0.21% CPI effect), with the market price of housing up by 0.6% and the interest component by 0.5%.

End-of-sale effects and higher fuel prices weigh heavily

The other main upward-pushing item this month was the clothing and footwear component, which is set to increase by 3.5% month-on-month (0.13% CPI effect), owing to a full reversal of summer sales. Because of this, the furniture and housewares component will rise by 0.6% (0.04%) between months. The recreation and culture component will increase by 0.5% (0.05%) according to our forecast, primarily because of higher prices for participation in sports.

Another key item pushing the CPI upwards is the price of food and beverages, which is set to rise by 0.3% (0.04%). Food price inflation has lost considerable steam, and if our forecast materialises, this month’s increase will be the smallest since July 2022.

The most prominent downward-pulling item for September is the travel and transport component, which we expect to decline by 0.5% (-0.08% CPI effect), owing to lower airfares offset by higher fuel prices. Airfares typically fall in September, when summertime demand tapers off. Apart from 2020 and 2021, the peak years of the pandemic, airfares have declined in September by an average of 16% in recent years. Our price measurements for this September reveal a far smaller reduction in airfares than is customary, presumably because of the past few months’ surge in fuel prices, which has begun to have a strong impact on airlines in Iceland and abroad. We therefore expect air transport prices to fall by only 10,4% (-0.23% CPI effect). Our forecast indicates that fuel prices will rise by 2.3% (0.04% CPI effect) this month and then keep climbing in the months to follow.

Near-term inflation outlook

Headline inflation measured 7.7% in August and has tapered off swiftly after peaking at just over 10% this past February. The turnaround in house prices and lower imported inflation have played a leading role in the past few months’ disinflation. The recent appreciation of the ISK has done much to contain imported inflation and has caused headline inflation to fall faster than it would have otherwise. Reduced house price inflation has also been a major factor, as the year-on-year rise in house prices is now at its smallest in over a decade. However, this volatility in home prices MoM has caused the CPI to fluctuate accordingly, and we hope the housing market will rebalance soon.

We expect twelve-month inflation to fluctuate within a narrow range in coming months. According to our preliminary forecast, the CPI will rise 0.4% in October, 0.2% in November, and 0.6% in December, and that headline inflation will measure 7.6% in December. We expect inflation to start falling faster in early 2024, perhaps hovering around 5% at mid-year, if our projections are borne out. According to our long-term forecast, inflation will average 5.3% in 2024 and 3.7 in 2025. The main uncertainty in our long-term forecast is wage agreements, which are set to expire one after another in early 2024.


Bergthora Baldursdottir




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