Inflation: a silver lining for cloudy times?
We expect the consumer price index (CPI) to rise by 0.3% month-on-month in March and that twelve-month inflation will measure 2.2%, down from 2.4% in February. Inflation will therefore remain somewhat below the Central Bank’s (CBI) inflation target and appears set to stay there for the present.
Summary
We forecast a 0.3% rise in the CPI in March
Inflation to fall from 2.4 % to 2.2%
End-of-sale effects push clothing and footwear prices upwards
Petrol prices fall
Airfares remain flat
ISK depreciation the main uncertainty
In spite of the chaos in the markets and the depreciation of the ISK following the spread of the COVID-19 virus, the near-term inflation outlook is relatively favourable. We project that inflation will be below the CBI’s target throughout 2020, yet the possibility of a further weakening of the ISK is the main uncertainty in our forecast. Statistics Iceland (SI) will publish the March CPI at 9:00 hrs. on 27 March.
End-of-sale effects and house prices push the CPI upwards
The leading upward-pushing CPI component this month is clothing and footwear, which we expect to return more or less to pre-sale price levels. We project the rise in clothing and footwear prices at nearly 4.4% (0.19% CPI effect). According to our forecast, furniture and housewares will rise in price by 0.7% (0.04% CPI effect).
Apart from clothing and footwear, the housing component will have the strongest upward impact, according to our forecast. The housing component was a major factor in the February rise and will probably behave in a similar fashion this month, as the housing market still appears quite lively. Our forecasting model assumes that imputed rent, largely a reflection of house prices, will rise by 0.7% (0.11%).
Travel and transport component falls between months
The travel and transport component is set to fall by 0.24% between months (0.04% CPI effect). Petrol prices will fall, according to our forecast, as crude oil prices began to slide in early February and then dropped precipitously in early March, set off by the price war between Saudi Arabia and Russia. Presumably, the effects of the tumble in oil prices will affect the price of petrol in coming months, although oil companies generally have a few months’ worth of inventory on hand at any given time. We project the decline in March at 1.4% (0.05% CPI effect). We also expect airfares to hold more or less steady between months, although they usually rise somewhat in March. As can be imagined, airfares are difficult to predict at present.
Inflation below target, but the situation is highly uncertain
The near-term inflation outlook is reasonably favourable, although there is significant uncertainty about how the COVID-19 pandemic will affect the economy. We expect inflation to remain below target through this year but then rise slightly above it in 2021. We expect the CPI to rise by 0.3% in April, 0.2% in May, and 0.3% in June, bringing headline inflation to 2.0% in June.
We project that inflation will average about 2.2% this year and then rise in 2021, to an average of 2.6%. Uncertainty is unusually pronounced at present, especially as regards the ISK. Our forecast is based on the assumption that the exchange rate will hold relatively steady, but if it falls decisively, imported goods prices will rise more than was have projected here. Another assumption in our forecast is that the wage agreements still pending will be landed on terms allowing for moderate pay rises, with the contract between the City of Reykjavík and Efling labour union providing a favourable precedent.
Author
LEGAL DISCLAIMER
This report is compiled by Islandsbanki Research of Islandsbanki hf.
The information in this report originates in domestic and international information and news networks that are deemed reliable, along with public information, and Islandsbanki Research’s own processing and estimates at each time. The information has not been independently verified by Islandsbanki which therefore does not guarantee that the information is comprehensive and accurate. The views of the authors can change without notice and Islandsbanki holds no obligation to update, modify or amend this publication if assumptions change.
This publication is only published for informational purposes and shall therefore not be viewed as recommendation/advice to make or not make a particular investment or an offer to buy, sell or subscribe to specific financial instruments. Islandsbanki and its employees are not responsible for transactions that may be carried out based on information put forth in the report. Before making an investment decision, recipients are urged to seek expert advice and get well acquainted with the investments market and different investment alternatives. There are always financial risks related to investment activities, including risk due to international investments and fluctuations in the exchange rate of currencies. Investors’ investment objectives and financial position vary. Past performance does not indicate nor guarantee future performance of an investment.
The research report and other information received from Islandsbanki are meant for private use only. The materials may not be copied, quote or distributed, in part or in whole, without written permission from Islandsbanki.
This report is a short compilation and should not be considered to contain all available information on the subject it discusses.
Supervisory body: The Financial Supervisory Authority of Iceland (www.fme.is).
UNITED STATES
This report or copies of it must not be distributed in the United States or to recipients who are citizens of the United States against restrictions stated in the United States legislation. Distributing the report in the United States might be seen as a breach of these laws.
CANADA
The information provided in this publication is not intended to be distributed or circulated in any manner in Canada and therefore should not be construed as any kind of financial recommendation or advice provided within the meaning of Canadian securities laws.
OTHER COUNTRIES
Laws and regulations of other countries may also restrict the distribution of this report.
Further information regarding material from Islandsbanki Research can be accessed on the following website: http://www.islandsbanki.is.