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Inflation dips slightly in November

The consumer price index (CPI) rose by 0.3% month-on-month in November, as we had expected, lowering headline inflation from 9.4% to 9.3%. The housing market is still buoyant, and imported inflation remains high. The outlook is for inflation to continue falling over the next few months, and at a brisker pace.

According to figures released recently by Statistics Iceland (SI), the CPI rose 0.3% month-on-month in November, lowering headline inflation incrementally, from 9.4% to 9.3%. Twelve-month inflation according to the CPI excluding housing measured 7.1%, however.

The November measurement is in line with analysts’ forecasts, which lay in the 0.3-0.4% range, including our own forecast of a 0.3% MoM rise in the CPI.

Housing market erratic

According to SI’s measurement, imputed rent, which is mainly a reflection of house prices, rose by 1% MoM (0.20% CPI effect). This came as no surprise to us, as it fits well with developments in the capital area house price index, published earlier this month, which indicated that the housing market is still going strong. At the moment, there is a strong correlation between the house price index compiled by the Housing and Construction Authority and the market price of housing as measured by SI.

The market price of housing rose 0.8% month-on-month. The increase was greatest in regional Iceland, at 1.1%, followed by capital area condominium prices, which rose 0.9% after standing still for the past two months. Single-family home prices in greater Reykjavík declined, however, by 0.3%.

The twelve-month rise in house prices eased marginally between months and now measures 21.2%. Prices in regional Iceland have risen the fastest during the period, at around 22.2%, followed by multi-family homes (21.0%) and single-family homes (20.7%) in the capital area.

Food prices up, airfares down

Apart from housing, the food and beverage component contributed the most to the November rise in the CPI. The component as a whole rose by 0.7% (0.11% CPI effect), and the increase appears relatively widespread; for instance, the price of bread and grains was up 1.6% (0.03% CPI effect), and the price of meat rose 0.8% (0.02%).

Other upward-pushing items were health, up 0.7% (0.03%) – as drugs prices generally move with the ISK exchange rate – and hotel and restaurant services, which rose 0.65% (0.03%).

But there were also a few items that pushed this month’s CPI measurement downwards, chief among them air transport, which fell 8.5% (-0.18% CPI effect), in keeping with the typical seasonal pattern featuring a drop in airfares in November and a rebound in December. Apart from airfares, the furniture and housewares component fell the most, or by 0.6% (-0.04%). It is unusual to see this item fall in November, but presumably the large sales that took place during the month made the difference.

Inflation set to fall faster

The weight of the housing component in twelve-month inflation is unchanged MoM, after having been on the decline since the summer. Of the headline figure of 9.3% for November, some 3.7% is due to the housing component. Imported inflation receded somewhat as a driver of inflation, although it was still second-strongest, accounting for 2.1%. Services prices account for another 1.9%, and domestic goods carry a weight of 1.6%.

Inflation will taper off rather quickly in coming months, according to our forecast. We expect the CPI to rise by 0.4% in December, fall by 0.2% in January, and rise again in February, by 0.6%. If this forecast is borne out, twelve-month inflation will measure 7.9% in February.

Although this may be music to many ears, it is still a goodly distance from the Central Bank’s (CBI) 2.5% inflation target. The housing market is still running hot, and imported inflation remains high. Nevertheless, we expect the housing market to be calmer and the ISK more stable than in the recent past, and both of these will do much to lower inflation in the near term. Our long-term forecast is unchanged: we expect inflation to average 6.4% in 2023 and 4% in 2024.

A number of factors must line up if inflation is to fall quickly. The key assumptions underlying our forecast are a cooler housing market and a stronger ISK later in the forecast horizon. Another uncertainty – and an important one – is the upcoming wage agreements, as the labour market is very tight at present and it is clear that negotiations will be extremely challenging in the months to come. Nevertheless, our forecast already allows for sizeable pay rises in 2023.


Bergthora Baldursdottir