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Inflation easing gradually

Once again, house prices account for a large share of the rise in the CPI. Headline inflation now measures 4.3% and has begun to taper off, albeit slowly. We expect it to fall further over the course of the year and align with the Central Bank’s (CBI) 2.5% target in Q3/2022.

According to figures just released by Statistics Iceland (SI), the consumer price index (CPI) rose 0.26% month-on-month in June, lowering headline inflation to 4.3%, from 4.4% in May. Twelve-month inflation excluding housing is now 3.6%. House prices have been pushing the index strongly upwards in the recent past. The June measurement is in line with our forecast of a 0.3% MoM rise in the CPI.

House prices the main upward-pushing item

 House prices strongly affected the June CPI measurement, as they have in recent months. Imputed rent, which is based largely on developments in house prices, rose by 0.7% MoM (0.12% CPI effect). The market price of residential property rose by 0.85% between SI measurements, which are based on a three-month average with a one-month lag. The MoM rise was the smallest since this past February, and the monthly increase was broadly the same in regional Iceland and the capital area.

 In the past twelve months, house prices nationwide have risen 12.6% by this measure. The twelve-month pace is virtually unchanged since SI’s last inflation measurement, whereas it had been trending rapidly upwards earlier in the year. The largest increase was in single-family home prices in greater Reykjavík, which rose by over 19%. Condominium prices in the capital area have risen more than 12% over the same period, and prices in regional Iceland are up by over 8%.

Airfares on the rise

Apart from the housing component, the travel and transport component was the strongest upward-pushing CPI item in June. It rose by 1.1% (0.14% CPI effect), as motor vehicle operating expense rose by 1.0% (0.06%) and air transport by 4.9% (0.07%). International airfares rose by 5.4% MoM and are up 10% since March. Apparently, the air travel market is starting to bounce back.

Other upward-pushing items included hotel and restaurant operations (0.05% CPI effect), recreation and culture (0.03%), and other goods and services (0.02%).

Offsetting the aforementioned upward-pushing items were a few that lowered the CPI during the month. Chief among them was the furniture and housewares component, which fell by 1.0% (-0.07% CPI effect) and can be expected to fall further in July, when summer sales kick in. The post and telephone services component fell by 2.4% (-0.04% CPI effect), and food and beverages fell by 0.3% (-0.04%), with the price of vegetables and potatoes having the strongest downward impact (-0.04% CPI effect).

Composition of inflation

It should take no one by surprise that the housing market should be the main driver of inflation at present, but it is not the only one. Of the 4.3% headline inflation figure for June, house prices explain 1.3%, imported goods another 1.3%, services 1.1%, and domestic goods 0.5%. In essence, then, the housing market accounts for over 30% of inflation at the moment.

The outlook for the months ahead

House prices are the main determinant of the CPI these days. We expect inflation to remain broadly unchanged until the autumn and then taper off until mid-2022. In our preliminary forecast, we assume that the CPI will remain flat in July, with summer sales offsetting house price inflation. We then expect it to rise by 0.5% in August and another 0.5% in September. If this forecast materialises, inflation will measure 4.3% in September. We anticipate a steady decline thereafter, with inflation reaching the target in August 2022. For the two years to follow, the outlook is for target-level inflation.

The main assumption underlying our forecast is that the ISK will appreciate in coming quarters, which we expect to happen when tourists start visiting the country in greater numbers. However, steeply rising house prices and wages could cause inflation to be higher and more persistent.

We are also fairly concerned about imported inflation and the pandemic-induced surge in shipping costs. These factors could cause imported goods prices to rise more than we have assumed here.


Bergthora Baldursdottir



Jon Bjarki Bentsson

Chief economist