Attention

This news is more than six months old

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

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.