Inflation falls to a two-and-a-half-year low

Headline inflation fell again in June and has finally dropped below 6% – for the first time since January 2022. The outlook is for relatively sticky inflation in the months immediately ahead, but today’s figures are a move in the right direction, and we expect inflation to have fallen to 5.2% by the year-end. In keeping with the recent pattern, imputed rent was the main upward-pushing item this month, although it packed less of a punch than we had forecast.

According to newly published figures from Statistics Iceland (SI), the CPI rose 0.48% month-on-month in June, pushing twelve-month inflation down to 5.8% from 6.2% in May – the first sub-6% measurement since January 2022. CPI inflation excluding housing currently stands at 4.0%. The June measurement was slightly below our forecast of a 0.6% rise in the CPI.

Housing component once again the leading driver of inflation, and airfares rise

Imputed rent rose by 0.77% (0.15% CPI effect), whereas we had projected an increase of 1.1% rise (0.21%). It is gratifying to see how benign SI’s new method for calculating owner-occupied housing costs appears to be at the outset, particularly in view of last week’s news coverage.

Apart from imputed rent, airfares were the main upward-pushing item this month. International airfares were up 8.0% (0.15%), somewhat outpacing our forecast. We had expected a smaller increase in June because airfares did not fall significantly in May, as they usually do after the Easter holidays.

Other upward-pushing components

Hotel and restaurant services rose in price by 2.09% (0.11%), nearly twice as much as we had anticipated, but this is due mainly to a 17% jump in the price of accommodation (0.09% CPI effect). Such spikes typically accompany the peak tourist season.

Food and beverage prices rose by 0.44% (0.07%), which is slightly more than we had expected but virtually a mirror of the May increase, which has clearly stretched into this month. In addition, the price of insurance rose by 3% (0.07%).

Petrol prices fall, and the first signs of summer sales are coming to the surface

The fuel and lubricants subcomponent fell by 0.87% (-0.03%), slightly more than we had anticipated. Motor vehicle prices declined by 0.45% (-0.03%), against a backdrop of weaker car sales in H1 than in the same period of 2023.

The first signs of upcoming summer sales are beginning to show, with a 0.72% decline in the price of furniture, housewares, etc. (-0.04% CPI effect) and a 0.88% drop in clothing and footwear prices (-0.03% CPI effect). The price of household appliances declined as well, by 2.6% (-0.04%). These price reductions indicate that summer sales will start earlier this year, perhaps suggesting that end-of-sale effects will come to the fore early as well.

The near-term outlook

For the coming term, we have adjusted our preliminary forecast slightly downwards, but it is a relief to see imputed rent rise as modestly as it did this month. We expect headline inflation to stick very close to 6.0% in the next few months.

  • July – CPI to rise 0.3% (twelve-month inflation 6.0%)
  • August – CPI to rise 0.4% (twelve-month inflation 6.0%)
  • September – CPI to rise 0.3% (twelve-month inflation 6.0%)

Naturally, there are many uncertainties, but in the months immediately ahead, inflation will depend not least on the impact of the new imputed rent calculation method, the rest of the summer tourist season, and the outcome of wage agreements for the remainder of the labour market. In order for our forecast to materialise, wage drift must be limited and the ISK exchange rate stable. The ongoing wars in various parts of the world are another uncertainty, and any escalation on that front will affect cross-border trade, prices, and economic developments in Iceland and abroad.


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Birkir Thor Björnsson