Food and beverage prices still climbing, but the housing market has grown more stable

Higher food and beverage prices – mainly the price of meat, fish, milk, cheese, and eggs – were the main upward-pushing items during the month, while the price of candy rose somewhat as well. In February, the agricultural product pricing committee decided to raise both the minimum price paid to farmers for milk and the wholesale price of milk and dairy products, which pushed the CPI higher in March. Furthermore, there have been difficulties with cocoa harvests in the recent term, and cocoa product prices have surged as a result. In all, food and beverage prices rose 0.67% MoM (0.10% CPI effect).

Imputed rent was the second-largest contributor to this month’s rise in the CPI, with an increase of 0.5% (0.09%), which was broadly in line with expectations, including our forecast of a 0.4% increase (0.08%). This is the second month running to see imputed rent increase by roughly half a percentage point, after dropping unexpectedly in January. We expect it to rise at roughly the same pace over the months to come.

End-of-sale effects tempered by a stronger ISK?

The main cause of the deviation between the CPI measurement and our forecast was end-of-sale effects, which were more modest than we had anticipated. We had expected winter sales to reverse in full in March, as they did so only partially in February. But they did not, and in fact, the furniture and housewares component eased slightly, while the rise in clothing and footwear prices was smaller than we had envisioned. In all, clothing and footwear prices increased by 2.38% (0.09% CPI effect) in March, and furniture and housewares prices fell by 0.89% (-0.04%). The latter component was affected strongly by a decline in the price of electrical appliances after a surge in February. In our opinion, this could be exchange rate-driven, as the ISK has appreciated noticeably in recent weeks, and breaking inflation data down by source and characteristics shows that imported goods prices fell MoM.

The annual increase in all core inflation indices lost pace between months: for instance, core 4 inflation (the CPI excluding agricultural products, vegetables, fruit, petrol, public services, and imputed rent) is now 2.8%, very close to target. CPI inflation excluding housing is down to 2.5% and has therefore already reached the target.

Airfares creep upwards during the prelude to Easter

Airfares rose in line with our forecast, showing the initial signs of the annual Easter holiday spike. Because the holiday comes in late April this year, most of the seasonal increase will take place next month. International airfares rose by 3.18% (0.07% CPI effect) in March. Fuel, another subcomponent of travel and transit, fell by 0.73% during the month (-0.03%), in line with our forecast.

Disinflation set to continue until summer

We expect headline inflation to keep falling until the summer. Our preliminary forecast is as follows:

• April – CPI to rise 0.6% (twelve-month inflation 3.8%)
• May – CPI to rise 0.3% (twelve-month inflation 3.5%)
• June – CPI to rise 0.4% (twelve-month inflation 3.4%)

As before, in order for our forecast to materialise, wage drift must be limited and the ISK exchange rate relatively stable.

The ISK has appreciated markedly in the recent past, and it looks as though buyers in the foreign exchange market are relatively sated at present, while investment-related currency inflows have probably been fairly sizeable. If the ISK keeps strengthening, imported inflation will fall even faster than is currently assumed. As far as wage drift is concerned, wage agreements covering a large share of the labour market will be reviewed on 1 September 2025 if inflation exceeds 4.95% in August, or if twelve-month inflation averages more than 4.7% over the period from March through August. According to our forecast, inflation will measure 3.3% by then, and we do not expect the review clauses in the wage agreements to be triggered this year unless something changes radically in the interim. On the other hand, the so-called wage scale supplement provided for in the contracts will be activated in April, owing to the past year’s rise in the private sector wage index. As a result, the pay scales provided for in contracts affecting most of the private sector will rise by nearly 0.6% in April 2025.

Recently concluded public sector wage agreements with teachers could affect inflation further ahead. The impact of the contracts will probably be limited at first and will centre mainly on stronger purchasing power for the worker group concerned and the likelihood of a more accommodative fiscal stance. Over time, though, wage drift could increase as a result, and in our assessment, there is elevated uncertainty about what lies ahead when the current contracts expire.

Other sources of uncertainty are domestic politics and the global geopolitical situation, as major changes in those arenas could alter matters significantly. It is still too early to predict the effects of a trade war on the economy. The impact on inflation is therefore unclear, as the structure of possible tariffs is still undetermined. The MPC will have the April inflation measurement in hand when it convenes for its next meeting, just after mid-May, and we expect headline inflation to measure 3.8% at that time.