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Inflation fights back, ticks upwards to 9.6%

The consumer price index (CPI) rose by 0.7% month-on-month in December, as we had expected, pushing headline inflation upwards from 9.3% to 9.6%. This is a temporary detour on the route to lower inflation, as the surge in airfares will reverse in the months to come and the housing market looks better balanced than before.

According to Statistics Iceland’s (SI) newest figures, the CPI rose 0.7% month-on-month in December, pushing headline inflation upwards from 9.3% to 9.6%. Twelve-month inflation according to the CPI excluding housing is now 7.5%. The December measurement is in line with analysts’ forecasts, which lay in the 0.5-0.8% range, including our own forecast of a 0.7% MoM rise in the CPI.

Airfares the main driver of December inflation spike

The travel and transport component was the strongest upward-pushing CPI item during the month. It rose by 2.1% (0.32% CPI effect), reflecting the tug-of-war between lower petrol prices and higher airfares. Petrol prices fell by 1.8% (-0.07%) MoM in December, whereas airfares jumped 19% (0.36%), which came as no surprise. This seasonal peak in airfares can be expected to unwind over the next few months.

Other key items that rose MoM in December were food and beverages, up 0.6% (0.10% CPI effect); furniture and housewares, up 1.4% (0.09%); and other goods and services, which rose 0.75% (0.05%), owing mainly to price hikes on cosmetics.

Housing market calmer

According to SI’s measurement, imputed rent rose by 0.4% (0.08% CPI effect). Imputed rent is based on two underlying factors: house prices and an interest component. The market price of housing fell by 0.04% MoM in December, but the interest component rose by 0.45% over the same period. The capital area house price index compiled by the Housing and Construction Authority (HMS), published earlier this week, fell by 0.3% in November.

House prices in regional Iceland rose by 0.6% MoM, whereas prices in greater Reykjavík fell, condominium housing by 0.1% and detached home prices by about 0.6%. The pace of house price inflation has eased considerably from its July-August peak. It now measures 20.3%, with prices in regional Iceland rising the fastest over the twelve-month period, at 21.5%, followed by multi-family homes (20.3%) and single-family homes (19.8%) in the capital area.

We noted the strong correlation between the house price index and the market price of housing in yesterday’s discussion of the housing market, and because of this interconnection, we are hardly surprised at this morning’s numbers. The housing market has clearly grown significantly calmer, and the outlook is for more of the same in the coming term. On the other hand, the interest component will probably continue to push imputed rent upwards in the next several months.

Disinflation in the cards for the coming term

The newest figures are in line with our forecast, and the outlook for the next few months is unchanged. Despite the December bump in headline inflation, we are very optimistic that relatively rapid disinflation is on the horizon over the next several months. The housing market is apparently much more tranquil than in recent quarters, and in all likelihood, the seasonal jump in airfares will reverse in the months to come. In our short-term forecast, we project that the CPI will decline by 0.3% in January, with seasonal sales pushing downwards and annual increases in public levies and services prices pulling in the opposite direction. We then expect the CPI to rise by 0.5% in February and 0.3% in March. If this forecast is borne out, headline inflation will measure 7.3% in March.

According to our long-term forecast, inflation will average 6.3% in 2023 and 3.9% in 2024. As always, the situation is highly uncertain, and even though it has to be considered quite likely that inflation will fall swiftly in the new year, a number of factors must fall into line to bring that about. Chief among them is the housing market, which must remain calm. Then there is the ISK, which needs to be more stable than it has been recently, mainly to keep imported inflation in check. And last but certainly not least is the still-outstanding wage agreements, which we hope will be settled in the weeks to come. Those that have already been approved are broadly in line with our forecast.


Bergthora Baldursdottir