Inflation below target in the coming term

We project that the consumer price index (CPI) will rise by 0.6% month-on-month in February and that twelve-month inflation will measure 2.1%, up from 1.7% in January. Inflation will therefore remain well below the Central Bank’s (CBI) 2.5% inflation target and will probably remain there in the coming term.


Summary

  • Our forecast: 0.6% rise in CPI in February

  • Headline inflation to rise from 1.7% to 2.1%

  • End-of-sale effects, airfares, and house prices push upwards

  • Petrol prices to fall

  • Inflation below target in 2020

The near-term inflation outlook is positive, owing to a stable króna, expectations of modest wage rises, and a well-balanced housing market. We forecast that inflation will remain below the CBI’s target through mid-2021. Statistics Iceland (SI) is scheduled to publish the February CPI at 9:00 hrs. on 27 February.

End-of-sale effects the main driver of the month-on-month rise

The end of seasonal sales always plays a major role in CPI movements between January and February. The items pushing most strongly upwards this time are furniture and housewares, which will rise 5.9% MoM (CPI effect 0.32%), and clothing and footwear, which will rise 3.1% (0.14%), according to our measurements.

We forecast that the travel and transport component will rise by 0.43% (0.06% CPI effect), The main upward-pushing item in the travel-transport component is airfares, which will increase again after the usual January decline. According to our measurements, airfares will rise about 8.2% (0.14% CPI effect) between months. On the other hand, we expect a MoM decline in both petrol prices (-0.06% CPI effect) and motor vehicle prices (-0.02% CPI effect).

Housing market relatively well-balanced

The housing component will increase by 0.11% (0.04% CPI effect), according to our forecast, with imputed rent providing most of the impetus for the rise. Imputed rent is largely a reflection of house prices and has fallen by about 1% over the past two months. We assume that the decline is now at an end, and we expect a 0.1% (0.02%) rise between months.

Twelve-month house price inflation as measured by SI is now 4.0% nationwide, roughly where it has been since mid-2019. In the past year, capital area house prices have risen 3.0%, while prices in regional Iceland are up 7.9%. In spite of the dip over the past two months, the housing market appears relatively balanced. In the months to come, we expect prices to rise broadly in line with the general price level, as we have noted in our new macroeconomic forecast.

 Inflation to remain below target

The near-term inflation outlook is reasonably good. We expect inflation to remain below the target until the middle of next year. We expect the CPI to rise by 0.5% in March, 0.2% in April, and 0.1% in May, bringing headline inflation to 1.8% by May.

We project that inflation will average about 2.0% this year and then rise in 2021, to an average of 2.4%. We base our forecast on a number of assumptions: that the still-outstanding wage agreements will provide for moderate pay rises, that the ISK will hold relatively stable, and that the balance in the housing market will improve.

Author


Bergthora Baldursdottir


Analyst

Contact

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