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Inflation finally back below target?

We project that the consumer price index (CPI) will rise by 0.5% month-on-month in December, lowering headline inflation from 2.7% to 2.4% If our forecast materialises, inflation will be below the CBI’s 2.5% target by the end of 2019, for the first time in a year and a half.


  • CPI to rise 0.5% in December

  • Inflation to fall from 2.7% to 2.4%

  • Airfares the chief upward-pushing item

  • Most other items to rise marginally between months

  • Inflation at target in the coming term

The inflation outlook for the coming term is favourable, owing to a stable ISK supported by expectations of modest pay rises. We forecast that inflation will also be below the Central Bank’s (CBI) 2.5% target at the beginning of 2020, measuring 2.4% in January, and then ease slightly above the target in February and March. Statistics Iceland (SI) will publish the CPI for the month at 9:00 hrs. on 19 December.

Airfares to rise, as is customary

The main upward-pushing item in December will be airfares, which look set to rise sharply, following the usual pre-holiday pattern. In the past five years, airfares have risen by an average of 17% in December. This year, we expect a month-on-month increase of just over 14% (0.25% CPI effect). On the other hand, we expect a 0.5% decline in fuel prices (-0.02%).

No other CPI components will pull strongly in either direction in December, although most item will ease upwards very slightly. The main inflationary items, apart from airfares, are food and beverages (up 0.4%; 0.05% CPI effect) and clothing and footwear (up 0.9%; 0.04% CPI effect).

We expect the housing component to hold relatively stable in December, rising as a whole by 0.2% (0.06% CPI effect). Imputed rent – mainly a reflection of house prices – looks set to rise by only 0.2% MoM (0.03%), well below the 2% increase over the last three months combined. We expect paid rent to rise by 0.4% (0.2% CPI effect).

Inflation at target in the coming term

The medium-term inflation outlook is relatively favourable, although we do expect inflation to overtake the target in coming months. We project that the CPI will fall by 0.4% in January and then rise by 0.5% in both February and March, bringing headline inflation to 2.7% by March. January will bring the tug-of-war between price list hikes and increased public levies, on the one hand, and post-holiday sales, on the other. Then, in February and March, the effects of seasonal sales will reverse.

We expect inflation to average 2.7% in 2020 and 2.9% in 2021. The main uncertainties in our forecast are the ISK exchange rate, which could fall, and the wage demands in still-pending labour market negotiations.


Bergthora Baldursdottir