Imputed rent up sharply

Housing was the main driver of the August rise in the CPI, owing chiefly to a 0.9% month-on-month jump in imputed rent (0.18% CPI effect), its steepest MoM rise since October 2025.

It has proven difficult to predict developments in imputed rent ever since SI changed its calculation method in summer 2024. The housing market has also cooled noticeably over the same period, and real house prices have fallen in the recent past. Rent prices have been less elastic, however, which to some extent should show in imputed rent, although the two variables are measured using different methods. In the past twelve months, rent prices have risen by 4.7% (July to July), while imputed rent is up 7.2% (August to August).

End-of-sale effects and university fees

The second-strongest driver of the MoM rise in the CPI was the end of summer sales, which typically affects inflation in August. Clothing rose in price by 2.7% (0.09% CPI effect), after tumbling 4.7% in July. Furniture and housewares prices increased as well, by 1.3% (0.05%), after a 4.1% drop in July. We assume that end-of-sale effects will make their mark on the CPI in September as well.

The education component of the CPI also weighs heavily in the August measurement, rising by 8.1% (0.08%), owing mainly to the hike in public university registration fees from ISK 75,000 to ISK 100,000.

One item that took us somewhat by surprise was food and beverages, with a 0.4% MoM increase (0.06% CPI effect). This is a larger rise than in recent months and is spread across a wide range of items.

Limited impact from the solar eclipse

Transport prices pushed the CPI downwards during the month. Airfares fell 9.0% (-0.33%), after surging in the month beforehand, and notably, the price of motor vehicles declined as well, by 1.4% (-0.06%). On the other hand, fuel prices rose by 1.5% (0.04% CPI effect).

In our inflation forecast for August, we speculated on whether the total solar eclipse would push prices upwards. The eclipse occurred on 12 August, during SI’s measurement week, and could easily have affected some CPI items. We assumed that its effects would be moderate, but newly available figures indicate that they were negligible. Airfares did not fall less sharply than usual for August, and the price of restaurant and accommodation services rose by only 0.25% (0.01%) MoM, whereas most forecasts assumed that hospitality prices would rise more steeply because of the eclipse.

Composition of inflation

Developments in the composition of inflation can be seen in the chart below. Of this month’s headline figure of 5.6%, the housing component continues to account for the largest share, at 1.7%, which represents an increase relative to July. Between April and July, however, the contribution of housing to inflation had remained flat. Here it is worth remembering, though, that inflation excluding housing is also quite high.

Public services account for a larger share this month and are the second-largest contributor, accounting for 1.4%, due to the hike in university registration fees. Until this month, the contribution from public services had held steady since the turn of the year, when the per-kilometre fee for motor vehicle use was adopted and categorised under public services. Tourism accounts for 0.7% of inflation and other services 0.9%. The twelve-month contribution from tourism is therefore broadly unchanged even though the index declined between months, as airfares plunged in August 2025.

Domestic goods explain about 0.6 percentage points of the headline inflation rate, and goods in mixed categories account for another 0.3 percentage points. The contribution from imported goods is negative, however, lowering inflation by 0.3 percentage points. This is due largely to the shift from petrol and diesel fuel taxes to the per-kilometre charge, which is categorised under public services instead of imported goods.

Wage agreement premises shattered

SI’s August measurement confirms that the assumptions underlying the so-called stability agreements have not held, as both the headline inflation rate for August and the six-month average for March through August are above the thresholds specified in the agreements. An assumptions committee will therefore convene after the coming weekend to review the situation. If no consensus can be reached on how to respond, the contracting parties are authorised to terminate the wage agreements by 8 October, with expiry set for 31 October.

The inflation outlook further ahead

Inflation developed in line with our forecast in August, and our preliminary forecast for the months ahead is therefore unchanged:

• September: CPI to rise 0.2% (twelve-month inflation 5.7%) – temporary Government measures will expire and value-added tax on petrol will rise. The increase in standard fees for healthcare centre visits will push upwards as well. A decline in airfares will pull in the opposite direction.
• October: CPI to rise 0.25% (twelve-month inflation 5.5%) – seasonal effects taper off, and most items rise marginally.
• November: CPI to fall 0.4% (twelve-month inflation 5.6%) – Singles Day will fall during the price measurement week. Airfares will drop. 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.

According to our preliminary forecast, inflation will remain stubbornly high for the rest of the year. Developments over the months to come will stem partly from base effects, as favourable index measurements from 2025 are set to drop out of twelve-month inflation figures. Two other upward-pushing items are the expiry of the temporary reduction in value-added tax on fuel and the increase in standard fees for healthcare centre visits, both of which take effect in September. On the other hand, we expect inflation to start tapering after the turn of the year and fall below 5% in early 2027.