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Inflation clocks in at 3.2%

The CPI rose 0.28% month-on-month, pushing headline inflation up to 3.2% from the July measurement of 3.1%. The CPI excluding housing, which has been a salient topic of discussion recently, has risen 3.1% in the past twelve months.

Statistics Iceland’s (SI) newly published consumer price index (CPI) data contained little in the way of surprises. The end of summer sales was the main cause of this month’s rise in the CPI. The housing component remained unchanged between months, and house price inflation is now at its lowest in over eight years. The inflation outlook has generally improved, and we assume the Central Bank’s (CBI) inflation target will be in sight by the end of this year.

The CPI rose 0.28% month-on-month, pushing headline inflation up to 3.2% from the July measurement of 3.1%. The CPI excluding housing, which has been a salient topic of discussion recently, has risen 3.1% in the past twelve months.

The August measurement is consistent with published forecasts. We had predicted a 0.2% MoM rise, and the increase projected by the banks’ research departments ranged between 0.2% and 0.3%. Most subcomponents moved in line with our forecast, and there were few surprises apart from a larger-than-expected rise in clothing and footwear prices and a dip in food and beverage prices.

End-of-sale effects the main driver of inflation

The end of seasonal sales made its mark on the August CPI measurement. Clothing and footwear prices rose 8.7% during the month (0.34% CPI effect) and furniture and housewares by 2.3% (0.12%). These two items tend to fall markedly in price during summer sales and then bounce back when sales are over.

Other items that rose in price in August were motor vehicles, up 0.5% (0.03%), and recreation and culture, up 0.3% (0.03%).

Airfares and petrol prices fall

The travel and transport component as a whole fell by 1.4% (-0.22% CPI effect), led by an 8.4% drop in air transport prices (-0.17%). Airfares usually spike over the summer and recede again in the autumn. In addition to the drop in airfares, petrol prices fell 1.7% (-0.06%). Furthermore, the price of food and beverages fell by 0.4% in August (-0.05%).

House prices in equilibrium?

Imputed rent, which is by and large a reflection of developments in house prices, fell by 0.15% MoM (-0.02% CPI effect). On the other hand, paid rent rose by 0.39% (0.02%), leaving the housing component as a whole unchanged between months.

According to newly released figures from SI, single-family home prices in greater Reykjavík rose by an average of 1.2% MoM. Condominium prices in the capital area rose by only 0.1%, however, and housing in regional Iceland fell in price by 1.2% during the month.

House price inflation falls to an eight-year low

According to SI figures, twelve-month house price inflation now measures 3.1%, its lowest in over eight years and the equivalent of a 0.1% decline in real terms. Prices in regional Iceland have risen by 3.3% in the past year. In greater Reykjavík, both condominium and detached housing prices are up 3.1% since August 2018. In real terms, house prices have therefore fallen by 0.1% in the past year. There has been a major shift in house price developments since end-2018, when twelve-month house price inflation measured 6.9% in nominal terms and 3.2% in real terms.

Disinflation on the horizon

We forecast that the CPI will rise by 0.3% in September, 0.3% in October, and 0.1% in November, bringing headline inflation to 2.8% in November. End-of-sale effects will make their mark on CPI measurements in September, but on the other hand, we also expect a seasonal decline in airfares during the month.

If our forecast materialises, inflation will ease in Q4/2019 and align with the CBI’s 2.5% inflation target by the year-end. We expect it to measure 2.7% at the end of 2020 and 2.8% at the end of 2021. The main uncertainties in our forecast are the potential weakening of the ISK and the wage demands in still-pending labour market negotiations. On the other hand, developments in house prices could lead to lower inflation than we have forecast here.


Bergthora Baldursdottir




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