This news is more than six months old

Inflation 4.8% in November

The consumer price index (CPI) rose month-on-month in November, albeit less than official forecasts had assumed. The housing component was the main driver of the rise in November, accounting for roughly 2/3 of the month’s increase in the index. The short-term inflation outlook has improved marginally since our last forecast, but even so, inflation will remain significant in coming months.

According to figures released recently by Statistics Iceland (SI), the CPI rose 0.35% month-on-month in November, pushing twelve-month inflation up to 4.8% from the October measurement of 4.5%. Twelve-month inflation excluding housing measured 3.0% during the month. The numbers show both that there is a significant difference between inflation with and without the housing component, and the latter figure indicates that inflationary pressures are rather widespread at present.

The November measurement was below our forecast at bottom of the range of official forecasters. We had projected that the CPI would rise 0.6% MoM. The main difference between our forecast and SI’s measurements lies in the travel and transport component, which rose less than we had anticipated. Furthermore, the item called other goods and services declined for the first time since May 2020, whereas we had forecast that it would increase.

House prices still climbing

The housing component kept faith with its recent pattern, driving the MoM rise in the CPI. The component as a whole rose by 0.7% (0.23% CPI effect), owing to a 1.1% rise in imputed rent (0.18% CPI effect), while paid rent rose 0.7% (0.03%).

Imputed rent primarily reflects movements in house prices, as it is intended as an estimate of the sacrifice cost associated with living in owner-occupied housing. According to SI’s house price data, condominium housing in the capital area led the MoM increase in November. Such properties rose in price by 1.4%, while single-family home prices in the capital area rose by 0.8% and housing in regional Iceland by 0.6%.

In the past twelve months, house prices nationwide have soared 16%, according to SI data, with single-family homes in greater Reykjavík up nearly 20%, housing in regional Iceland up nearly 16%, and capital area condominium prices up 15%. Therefore, by this measure, the pace of house price inflation is still accelerating and is now at its fastest in four years.

It should be borne in mind, though, that SI measurements show with a lag. Data underlying the November measurement, for instance, cover purchase agreements registered in August-October, and in some cases they capture transactions taking place even earlier in the year. Although there are no signs as yet that recent policy rate hikes and borrower-based measures adopted by the Central Bank (CBI) have begun to bite, the effects could come to the fore in the next few months.

Other upward-pushing CPI items

Apart from the housing component, the travel and transport component increased the most in November. It rose by 0.6% (0.08% CPI effect), as motor vehicle operating expense rose by 0.6% (0.08%), including a 1.9% (0.06%) increase in the price of petrol and oils. Petrol prices are up more than 20% in 2021 to date, driven by surging global fuel prices.

The air travel component remained flat MoM, although closer scrutiny shows that international airfares fell 1% MoM. This did not affect the index as a whole, however. International airfares have fallen by 13% since August, when the Delta variant of the virus began to spread in earnest. We had forecast that airfares would rise in November, but we have found them exceedingly difficult to predict ever since the pandemic struck.

Other upward-pushing items were furniture and housewares, up 0.9% (0.06%), and food and beverages, up 0.2% (0.03%). We consider it likely that these items have risen in price because of price hikes abroad and increased transport costs.

More newsworthy, though, is the fact that several items declined MoM, a rare occurrence these days. Other goods and services declined by 0.3% (-0.02% CPI effect), driven mainly by two subcomponents: cosmetics (-0.03% CPI effect) and jewellery (-0.01% CPI effect). We attribute this to end-of-sale effects following recent sales, as this component has not declined since May 2020. Other items that fell in price between months were postal and telephone services, down 1.4% (-0.02% CPI effect), and health, down 0.2% (-0.01%). The latter decline was driven by a MoM drop in the price of drugs and medical products.

The composition of inflation has changed markedly in the past year, as the chart below indicates. The housing component has taken over from imported goods as the leading cause of inflation. Of the 4.8% headline inflation figure for November, 2.2% stems from housing, 1.1% from domestic services, just over 1% from imported goods, and 0.5% from domestic goods.

As these figures show, inflationary pressures are not confined to the housing component, although it does explain a large share of inflation at the moment. For example, inflation excluding housing measures 3.0%, which is also above the CBI’s inflation target.

The near-term inflation outlook

The short-term inflation outlook has improved marginally since our last forecast, but even so, inflation will remain significant in coming months. There seems to be no end in sight to the price pressures from the housing market, and short-term developments in the price of imported items are more uncertain than before.

According to our preliminary forecast, the CPI will rise by 0.5% in December, fall by 0.2% in January, and then rise by 0.6% in February. If this forecast is borne out, twelve-month inflation will measure 4.9% in February. Thereafter, we expect an appreciation of the ISK, a slower increase in house prices, and perhaps flat or declining imported goods prices. Inflation will start to ease steadily but will not realign with the CBI’s 2.5% inflation target until the beginning of 2023. According to our forecast, inflation will average 4.0% in 2022 and 2.6% in 2023. In order for our long-term forecast to materialise, the pay rises in next year’s wage negotiations must be modest, house price inflation must subside, and the housing market must rebalance by 2023.


Bergþóra Baldursdóttir



Jón Bjarki Bentsson

Chief economist