Airfares and end-of-sale effects

The main contributors to the MoM rise in the CPI are end-of-sale effects and seasonal hikes in airfares. The CPI division called furnishings, household equipment, and routine household maintenance increased by 5.3% (0.21% CPI effect), thereby wiping out last month’s decline. Clothing and footwear prices rose 5.1% (0.17%), after a more than 7% drop during January sales. The effects of winter sales in this category are likely to reverse in full in March. The conclusion of seasonal sales had a stronger impact than we had anticipated, however, particularly in the case of furnishings and household equipment. We hope end-of-sale effects will be more muted next month.

Airfares rose as well in February, by 7.2% (0.17%), as they typically do after the January decline. This month’s increase turned out larger than we had assumed, though, and was larger than usual for February.

Food prices rise, while housing stands more or less still

We were also taken somewhat aback by food prices, which rose more than expected between months. The increase measured 0.9% (0.14% CPI effect) and appeared to be spread across a number of food categories. The price of vegetables rose the most, although sugar, candy, and other items increased in price as well. The price of beverages was broadly unchanged MoM, however.

Altogether, food prices have risen by a combined 1.9% in the past two months, which is cause for real concern. They surged early in 2025, although SI’s measurements indicate that the increase lost pace around mid-year. This gives rise to the question whether food price inflation is gathering pace again. The Icelandic Federation of Labour’s (ASÍ) grocery price index, which measures movements in the price of foodstuffs, has been on the rise in February, particularly after SI’s price measurement week and after analysts released their forecasts. At the moment, though, it is very close to SI’s measurement, as can be seen in the chart below.

For the most part, the housing component of the CPI was better-behaved in February than in the recent past. Overall housing costs increased by 0.5% (0.15% CPI effect). Of that amount, paid rent rose by 1% (0.04%) and imputed rent by 0.15% (0.03%).  The bright spot in these figures is the continued slowdown in the rise in imputed rent, which carries significant weight in the CPI. Water utilities and other housing-related services were the main drivers of the increase in the housing category, rising by 4.3% (0.07%), in line with our forecast.

It is also worth mentioning the sharp MoM decline in fuel prices, which measured 5.8% (-0.15%). According to our measurements, however, fuel prices were virtually flat MoM, as the aforementioned decline is due to SI’s correction of a measurement error in January. The cancellation of excise taxes on fuel therefore had an even stronger effect in January than that measurement had indicated.

The inflation outlook further ahead

Headline inflation held steady in February, clinging to its highest level since September 2024. Our forecast for the months ahead is as follows:

• Headline inflation held steady in February, clinging to its highest level since September 2024. Our forecast for the months ahead is as follows:
• March – CPI to rise 0.6% (twelve-month inflation 5.4%) – Winter sales reverse in full; airlines rise during the run-up to Easter
• April – CPI to rise 0.3% (twelve-month inflation 4.8%) – Minor increase in most items; smaller rise in airfares because of the timing of Easter
• May – CPI to rise 0.2% (twelve-month inflation 4.8%) – Minor increase in most items; airfares ease slightly

If our preliminary forecast materialises, headline inflation will measure 4.8% in May. As the newest measurements indicate, inflation is proving a bit more stubborn than we had estimated. All indices of core inflation show a MoM increase, which suggests that underlying inflationary pressures are growing. The February inflation measurement is the last one before the MPC meets again in advance of the 18 March interest rate decision date. All of the evidence available thus far implies that rates will be held unchanged in March, and the probability of a rate cut before mid-year has receded.