Imputed rent rises

Imputed rent rose 0.9% MoM in September (0.18% CPI effect). In addition to being a bigger increase than in recent months, it is larger than we had envisioned. Statistics Iceland (SI) changed its methodology for calculating imputed rent in summer 2024. Initially, the change had a positive impact on inflation, which fell more rapidly than it would have otherwise. Rent prices, however, have risen more than house prices in recent months and, according to our calculations, appear to have more than caught up with house prices. Imputed rent also includes price indexation, which is well to bear in mind when examining the chart below. As the chart shows, the market price of residential property has eased slightly, while imputed rent (the rent price) continues to rise.

Airfares and end-of-sale effects play tug-of-war

Airfares fell 14% (-0.38%) MoM. They have now fallen by 26% in the past two months combined, after rising steeply this summer. The cost of operating motor vehicles fell 0.6% (-0.04% CPI effect) between months, owing to a decline in the item called other services for personal transport equipment, which, together with petrol prices, explains the downturn. The transport component, which includes the aforementioned items, was the only component that fell MoM in September

Other components rose between months. After the housing component, clothing and electrical equipment contributed the most to the rise in the CPI, owing to end-of-sale effects. Clothing and footwear rose in price by 2.9% MoM (0.1% CPI effect), and furniture and housewares prices were up 1.7% (0.08%).

Other components that rose MoM in September included recreation and culture, up 1.7% (0.08% CPI effect), due to hikes in fees for athletics, educational seminars, and gym memberships. Food prices rose 0.4% (0.06%), mainly because of an increase in dairy product prices, plus a jump in the price of chocolate and candy.

Inflation set to bounce around the upper tolerance limit in the coming term

The September measurement is broadly in line with our forecast, and there are no real surprises in today’s numbers. Our preliminary forecast for the months ahead is as follows:

• October: CPI to rise 0.35% (twelve-month inflation 4.2%) – Seasonal effects have tapered off. Most items pull in the same direction, increasing marginally. Headline rises incrementally between months.
• November: CPI to rise 0.2% (twelve-month inflation 4.3%) – Airfares fall, offsetting rises in other key items.
• December: CPI to rise 0.4% (twelve-month inflation 4.3%) – Airfares spike during the holidays. Other items increase marginally. Headline inflation holds steady MoM.

Twelve-month inflation will therefore hover around 4.2-4.3% in the next several months, according to our forecast, remaining just above the CBI’s 4% upper threshold. Headline inflation is clinging stubbornly to the upper deviation limit, where it has been for virtually all of this year. According to our newly released macroeconomic forecast, published yesterday, we project average year-2025 inflation at 4.1%. According to our long-term forecast, inflation will average 3.9% in 2026 and 3.7% in 2027.