November discount days have a strong impact

Airfares were the main downward-pushing item this month, with air transport prices falling 14.4% (-0.33% CPI effect). We had expected a much more modest decline, partly because of the impact of Play’s insolvency on the supply of flights. Icelanders have been flashing their passports with a will in the recent term, and 2025 is shaping up to be a record year for overseas travel; however, it could be that airlines have detected a downturn in demand for travel to Iceland, as arrivals numbers are down in Q4 to date.

Special discount days in November have gained in popularity in recent years. Singles’ Day, which occurred during SI’s price measurement week this time, affected the CPI far more than we had envisioned, causing several key components to decline MoM in November. It is the strongest effect such discount days have had to date on inflation measurements. Chief among the items affected are these:

• The price of furniture, housewares, etc., fell by 2.2% (-0.11% CPI effect) – most subcomponents declined between months.
• Clothing and footwear prices fell 2.7% (-0.1%) – driven mainly by a 10% drop in footwear prices.
• Recreation and culture prices declined 0.4% (-0.05%) – with recreational goods such as television sets, computers, and miscellaneous other recreational products and toys falling in price.
• Other goods and services declined by 0.4% (-0.02% CPI effect).

Few items rose in price this month. The main increase was in imputed rent, which rose 0.5% (0.10%), far less than in the previous two months. We still consider imputed rent the largest single uncertainty in our short-term forecast, as it has proven quite difficult to predict. Food and beverage prices rose by 0.2% (0.2% CPI effect), in line with expectations.

Underlying inflation declines

All core indices fell MoM, indicating that underlying inflation (i.e., inflation excluding volatile items) is easing. This will surely come as a relief to the Central Bank (CBI) Monetary Policy Committee (MPC), which pays close attention to underlying inflation in its assessment of inflationary pressures. Interestingly, core 4 inflation, which measures inflation excluding imputed rent and several other volatile items, now measures 2.5% and has therefore returned to target.

Are today’s inflation figures only a brief respite?

 It is unusual to see most CPI components decline MoM as they did this time. The November discount days are a fairly recent addition to Icelandic consumers’ calendar, and their effects have not been this strong in past years. It is positive to see inflation fall and reach its lowest point in five years. The downward impact of this month’s sales will likely provide only temporary comfort, as prices will rise again when the sales conclude in December. In our opinion, though, the short-term inflation outlook has improved overall. Our preliminary forecast is as follows:

• December: CPI to rise 0.6% (twelve-month inflation 3.9%) – Airfares spike during the holidays. Items affected by November sales will rise in price.
• January: CPI to fall 0.1% (twelve-month inflation 4.1%) – Price list hikes and unit-based increases offset winter sales and falling airfares.
• February: CPI to rise 0.7% (twelve-month inflation 3.9%) – End of seasonal sales for most key items.

We have increased our forecast for December, when November discounts will reverse. If our preliminary forecast materialises, headline inflation will measure 3.9% in February. As can be seen, inflation will still hover around the upper deviation threshold of the target but will be lower than we have projected previously.

As is noted above, the main uncertainty in our forecast is imputed rent, which has proven difficult to predict in the recent past; however, there is also considerable uncertainty about developments in January. Changes in excise taxes on motor vehicles will affect car prices, and it is unknown how strongly the per-kilometre charge for vehicle use will affect the CPI. The per-km charge is set to take effect at the turn of the year, provided that the bill of legislation currently before Parliament is passed into law.