According to newly published figures from Statistics Iceland (SI), the CPI rose 0.91% month-on-month in February, lowering headline inflation from 4.6% to 4.2%. Inflation excluding housing declined as well, from 3.0% to 2.7%. The February CPI measurement was in line with our forecast. Overall, analysts’ forecasts lay in the 0.61-1.1% range, including our own projection of a 0.9% MoM rise in the CPI.
Inflation eased further in February
Twelve-month inflation subsided in February, in line with analysts’ forecasts. This month’s CPI measurement is the last to be published before the Central Bank (CBI) Monetary Policy Committee’s (MPC) next interest rate decision date, and it should provide valuable input for deliberations at the MPC’s March meeting. Furniture, housewares, etc., contributed the most to the CPI rise in February, followed by food and beverages. We expect continued disinflation in the months to come.
Seasonal sales reverse in full
Price hikes on furniture, housewares, and so forth weighed heaviest in this month’s rise in the CPI. They were driven by end-of-sale effects, as January sales generally reverse partly or wholly in February. It looks as though discounts on furniture, housewares, and related goods reversed in full in February, with prices rising 5.6% (0.26% CPI effect), after having fallen by 4.64% in January (-0.23%). Another CPI item generally affected by seasonal sales is the clothing and footwear component, which rose by 2.09% in February (0.07% CPI effect), after dropping by 6.92% (-0.26%) in January. It is quite possible that end-of-sale effects in clothing stores will stretch into March.
Food and beverage prices up markedly
The strongest upward impact on the CPI, apart from furniture and housewares, came from food and beverage prices. We had projected an increase of 0.46% (CPI effect 0.0%), but actual price hikes were noticeably larger. They also exceeded the increase in the Icelandic Federation of Labour’s grocery price index, which has often correlated strongly with the food/beverages component of the CPI in the recent past. In all, food and beverage prices rose 1.1% MoM (0.17% CPI effect),
owing mainly to two key factors. The first of these is the impact of difficulties with harvests of various commodities such as coffee and cocoa, which have soared in price recently, and the second is the negotiated pay rises that took effect at the turn of the year. We have discussed developments in the general wage index in a recent analysis. In the months to come, we expect a rather slower increase in food prices, but uncertainty remains about harvests of various commodities for food production and about a possible trade war. Furthermore, the uncertainty about tariffs has a negative impact even if a full-blown trade war does not develop.
Other items
The housing, heating, and electricity component rose by 0.5% (0.15%), including an increase of about 0.41% (0.08% CPI effect) in imputed rent. We had projected that imputed rent would increase by 0.45% (0.09%), but this item has proven difficult to forecast in the recent term. Fairly convincing signs of a cooling rental market have come to the fore recently, and if the trend continues – and all else being equal – inflation will approach the target more rapidly than is currently forecast. Other housing-related items generally rise in February, when the first payments according to updated price lists for housing services are due. The component as a whole rose by 1.82% (0.03% CPI effect). The steep drop in twelve-month inflation is due in part to strong base effects from this item, as the February 2024 surge in waste collection fees weighed particularly heavily last year.
After this January’s unusually large drop in international airfares, we had expected prices to rise more aggressively in February than they ultimately did. Airfares rose by 2.18% (0.05%) during the month, whereas we had forecast an increase of 5.0% (0.11%).
The inflation outlook
We expect inflation to keep easing in the months ahead, falling below the 4% upper deviation threshold of the CBI’s inflation forecast as soon as March. Our preliminary forecast is as follows:
- March – CPI to rise 0.4% (twelve-month inflation 3.8%)
- April – CPI to rise 0.5% (twelve-month inflation 3.7%)
- May – CPI to rise 0.3% (twelve-month inflation 3.4%)
Recently concluded public sector wage agreements with teachers could affect inflation further ahead, although they have eliminated uncertainty about on the negotiations themselves.The impact of the contracts will probably be limited at first and will centre mainly on stronger purchasing power for the worker group concerned and the likelihood of a more accommodative fiscal stance. Over time, though, wage drift could increase as a result, and in our assessment, there is elevated uncertainty about what lies ahead when the current contracts expire.
Other sources of uncertainty are domestic politics and the global geopolitical situation, as major changes in those arenas could alter matters significantly. Nevertheless, the February inflation measurement should be of use to the MPC when it convenes for deliberations about the next interest rate decision, to be announced on 19 March.
