Travel and transport the main downward-pushing item

After a seasonal surge in June and July, airfares fell in August, continuing the typical pattern. But this month’s drop measured 11.8% (-0.36% CPI effect), exceeding our forecast, as demand for travel had been keen this summer and the spike in airfares correspondingly steep. We had forecast that airfares would fall more in September, but the August figures have prompted us to revise our projections, and we now expect the September decline to be more modest. Alongside airfares, fuel prices continued to taper off, falling by 0.8% (-0.03% CPI effect) month-on-month in August. The travel and transport component is therefore the key driver of this month’s fall in the CPI.

Other key items rose between months, chief among them the housing component, which increased by 0.42% (0.12%) MoM. Within the housing component, imputed rent rose 0.4% (0.09%), in line with our forecast. The furniture, housewares, etc. component rose in August by 1.2% (0.06%), with end-of-sale effects pushing prices upwards by 6.7% and electrical appliances falling in price by 6.7%.

Food price inflation appears to be tapering off. For the second month in a row, prices rose only incrementally. In August, the MoM increase measured a mere 0.06% (0.01% CPI effect), and we expect prices to hold steady in the months ahead, as early-2025 wage rises have largely come to the fore and the appreciation of the króna is curbing imported inflation.

Housing and services the main drivers of inflation

Developments in the composition of headline inflation can be seen in the chart below. Of August’s 3.8% inflation rate, the housing component is the single largest contributor, at 1.6%, although this is down markedly from the 3.2% contribution seen in August 2024. Services prices are the second-strongest driver of overall inflation, accounting for a total of 1.1%, and declined between months. Domestic goods account for 0.7% and imported goods 0.3%.

Underlying inflation, a measure the CBI’s Monetary Policy Committee gives particular attention, has decreased slightly month-on-month. All core indices have declined by 0.3–0.5%.

The outlook has brightened, but inflation will hold close to the upper bound

This month’s inflation figures are certainly good news. Last year’s cancellation of university fees has now dropped out of twelve-month measurements, but this did no harm to twelve-month inflation movements, as downward-pushing items compensated for it with room to spare – again, good news for the near-term inflation outlook. Because the clouds have parted somewhat, our preliminary forecast for the next few months has improved. We now expect the following:

• September: CPI to rise 0.2% (twelve-month inflation 4.2%) – Continued end-of-sale effects, mitigated by a drop in airfares. Various price hikes due to fee schedule revisions. Free primary school meals drop out of twelve-month measurements.
• October: CPI to rise 0.3% (twelve-month inflation 4.2%) – Seasonal effects have tapered off. Most items pull in the same direction, increasing marginally. Headline inflation holds steady MoM.
• November: CPI to rise 0.2% (twelve-month inflation 4.3%) – Airfares fall, offsetting rises in other key items.

Headline inflation will rise in September, but less than we had previously envisioned, owing to the positive effects of today’s measurement. Because airfares fell more than we had anticipated in August, we now expect a smaller drop in September. According to our forecast, inflation will hold just above the 4% deviation threshold in the months thereafter, inching up to 4.3% in November.