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Inflation breaks the 10% barrier for the first time since autumn 2009

A number of factors combined to push inflation higher in February. Inflation now measures 10.2%, its highest in over a decade. Although the Central Bank’s (CBI) tighter monetary stance has begun to have a palpable effect on the housing market, the outlook is for another policy rate hike in March.

According to newly published figures from Statistics Iceland (SI), the CPI rose 1.39% month-on-month in January, propelling headline inflation into double-digit territory, from 9.9% to 10.2%. It is Iceland’s highest inflation rate in more than a dozen years. In terms of the CPI excluding housing (CPIXH), which rose 1.8% MoM in February, twelve-month inflation now measures 8.9%.

The February measurement is well above analysts’ forecasts, which lay in the 0.8-0.9% range, including our own forecast of a 0.8% MoM rise in the CPI. The difference between our forecast and SI’s measurements lies mainly in items such as furniture and housewares, recreation and culture, and airfares. On the other hand, the housing component rose less than we had anticipated.

Near-ubiquitous inflationary pressures

Several factors are working together to push inflation upwards at present, and it is impossible to blame the deviation between forecasts and SI’s measurements on anything in particular. For instance, various goods that had been on sale in January rose sharply in price this month. Among them are furniture and housewares, up 8.7% (0.53% CPI effect), and recreation and culture, with price hikes on computers, television sets, and such items weighing heaviest in the 1.5% MoM spike in the component as a whole (0.14% CPI effect). Clothing and footwear prices surged as well, with a MoM increase of 6.8% (0.21%). It is not yet obvious whether these items rose primarily because of early end-of-sale effects or whether new products were simply that much more expensive than those put on sale in January.

Food and beverage prices rose by 1.9% during the month (0.3%), on the heels of a 2% jump in January, with the February increase drive mainly by imported food prices. In addition to these, health-related CPI items rose by 1.5% (0.05%), and the price of hotel and restaurant services increased 1.3% (0.07%).

House prices put the brakes on inflation for a change

In a radical shift from the recent situation, house prices held the CPI increase in check this month. According to SI’s data, the market price of housing fell by 0.5% since the last measurement. That said, imputed rent inched upwards in February (0.02% CPI effect), owing to the interest component, which is based on indexed mortgage lending rates. Those rates have climbed steadily in the past year.

It seems quite clear that the interest rate hikes and tighter mortgage lending requirements introduced by the CBI have begun to make a real impact on house prices. Year-on-year house price inflation now stands at just under 16%, according to SI, the slowest pace since year-end 2021.

Rent prices rose by 0.9% (0.04%), however, and home maintenance by just over 2% (0.02%).

There were a few bright spots in SI’s otherwise gloomy inflation measurements. For instance, motor vehicle prices fell by 0.7% (-0.04%), after surging at the beginning of the year. Home heating and electricity prices were down 0.2% (-0.01%) and petrol by 0.4% (-0.01%). In addition, the price of telephone and internet services fell by just over 2% (-0.02%).

The winter of our discontent

Once again, inflation has turned out higher than forecast. To add insult to injury, it is very widespread, which exacerbates the risk of its becoming entrenched. Such a broad-based rise in CPI components is a sign that cost pressures in manufacturing, retail and wholesale trade, and services is spreading to the price level. A sizeable share of private sector workers received handsome pay rises at the turn of the year, at a time when the effects of then-recent hikes in the price of imported inputs and fully finished imported goods were showing in ever greater measure. Nevertheless, we think inflation is likely to fall in coming months. According to our preliminary forecast, we expect the CPI to rise by 0.6% in March, 0.4% in April, and 0.3% in May. If these projections materialise, inflation will measure 8.4% in May. In view of recent developments, though, it is wise to add a caveat to this preliminary forecast, and we will re-examine the outlook before our next inflation forecast, set for publication in the first half of March.

Policy rate hike probable in March

At the time of the last interest rate decision, the CBI expressed concerns about how inflation was becoming embedded throughout much of the economy, and the Monetary Policy Committee (MPC) was of the view that it would probably have to tighten the monetary stance still further in the near future. This month’s inflation data will do nothing to allay those worries, and as we see it, there is little to prevent a policy rate hike in March.


Jón Bjarki Bentsson

Chief economist