We project that the consumer price index (CPI) will rise by 0.1 % month-on-month in November, lowering headline inflation from 2.8% to 2.7%, the lowest measurement in over a year.

The inflation outlook for the coming term is favourable, owing to a stable ISK supported by expectations of modest pay rises and reduced house price inflation. We project that inflation will fall below the Central Bank’s (CBI) inflation target as soon as next month, measuring 2.4%. Statistics Iceland (SI) is scheduled to publish its November CPI measurement at 9:00 hrs. on 27 November.

Housing market still lively?

We project that the housing component of the CPI will rise by 0.5%, raising the CPI by 0.15%. The main driver of the increase is imputed rent, which is primarily a reflection of house prices. We expect imputed rent to rise by 0.80% (0.13% CPI effect). We expect paid rent to rise by 0.4% (0.2% CPI effect).

In October, imputed rent was up 1.05% month-on-month, and according to our measurement, this trend will continue in November. It therefore appears that the housing market is still quite lively at present.

House prices were up 1.4% MoM in October, the largest single-month increase in a year and a half. It will therefore be interesting to see what SI figures show in the months ahead. It will gradually come to light whether the housing market is rallying again, or whether the recent uptick is merely temporary.

Airfares and petrol prices fall

We forecast that the travel and transport component will decline by 1.2% (-0.17% CPI effect), owing mainly to seasonal reductions in airfares and falling petrol prices. Over the past five years, airfares have fallen in November by an average of 14%. We project this November’s decline at 10% MoM (-0.19%), and we expect a 0.4% decline in petrol prices as well (-0.01%).

No single item stands out as a key upward-pushing component. Among the items that will raise the CPI are food and beverages (up 0.15%; CPI effect 0.02%), furniture and housewares (up 0.4%; CPI effect 0.02%), and recreation and culture (up 0.2; CPI effect 0.02%).

Inflation at target in 2020

The inflation outlook is relatively positive for the coming term. We expect the CPI to rise by 0.5% in December, fall by 0.4% in January, and rise again in February, by 0.5%. If these projections are borne out, inflation will measure 2.7% in February but will be below the CBI’s target in both December and January. January will feature the seesaw effect of price list hikes and increased public levies, on the one hand, and post-holiday sales, on the other. In February, however, the effects of seasonal sales will reverse to a large degree.

We expect inflation to average 2.5% in 2020 and 2.8% in 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.