Airfares retreated after the Easter spike, and the furniture and housewares component dropped unexpectedly

The annual Eastertide surge in airfares partially reversed in May, as we had anticipated. In all, airfares fell 7.4% (-0.18% CPI effect), whereas we had forecast a decline of 5.2% (-0.13%). Fuel, another subcomponent of travel and transit, fell by 1.07% (-0.04%) during the month. The global market price of Brent crude is near its lowest in over four years, and we expect fuel prices to keep sliding until the summer. The second-round effects of lower oil prices should also kick in more strongly as the summer advances, alongside the effects of a stronger ISK.

We were surprised by the plunge in the furniture and housewares component, which stemmed mainly from the price of electrical appliances. Overall, prices fell by 1.35% (-0.07%) during the month, whereas we had projected only a marginal decline. Within the component, electrical appliances led the way with a drop of 4.34% (-0.05% CPI effect) in what could be either the first signs of summer sales or the impact of a stronger ISK, but most likely both.

Inflationary items: the usual suspects

Imputed rent was the largest driver of the CPI increase this month, rising in excess of forecasts once again. In all, it rose 0.73% (0.15%), whereas we had projected an increase of 0.4% (0.08%). Imputed rent has risen more than we projected for two months in a row, which causes us some concern, yet we still expect smaller increases in the period ahead. On the other hand, a seasonal uptick in short-term property rentals could cause a setback during the summer.

Food and beverage prices were the second-strongest inflationary item this month. In all, prices rose 0.7% (0.11% CPI effect), in line with our forecasted increase of 0.6%. The strongest effects came from higher milk, cheese, and egg prices, which were due largely to the agricultural pricing committee’s decision to hike the minimum price of milk in May.

What’s next?

Inflation has been slightly higher than expected in 2025 to date. Domestic goods have been one of the main drivers of inflation this year, as the cost of domestic production has spiked, partly in response to higher wage costs. Other factors have curtailed inflation – such as a stronger ISK and declining global oil prices – although the disinflationary effect has been weaker than previously hoped. We expect headline inflation to keep falling this summer. Our preliminary forecast is as follows:

• June – CPI to rise 0.4% (twelve-month inflation 3.7%)
• July – CPI to rise 0.2% (twelve-month inflation 3.4%)
• August – CPI to rise 0.3% (twelve-month inflation 3.6%)

Headline inflation is expected to pick up at the end of summer and again in the autumn, when the effects of two policy changes from last year – the cancellation of fees at several universities and the introduction of free meals in primary schools – drop out of twelve-month measurements. In our newly released macroeconomic forecast, we projected that inflation would average 3.9% this year, up from 3.6% in our January forecast. The upward revision is due mainly to a poorer initial position.

Geopolitical uncertainty is at its most acute in quite a long time and could doubtless have a profound impact on developments ahead. Inflation could either rise or fall as a result, depending on whether demand or supply is more strongly affected. If supply chains are severely disrupted, inflation will probably rise in the short run, but it will probably retreat over time if demand slows significantly. For 2026, we expect inflation to keep declining, coming to a halt just below the upper deviation threshold of the CBI’s inflation target but above the target itself. Our forecast assumes that inflation will average 3.5% in 2026 and 2027.