End-of-sale price hikes and housing costs key drivers

End-of-sale effects will weigh heaviest in the August CPI increase, according to our forecast. Although these effects can be seen in many components of the index, they are strongest in two categories: clothing and footwear, and furnishing and household equipment. We project that clothing and footwear prices will rise by 1.3% (0.04% CPI effect) during the month. We also expect the price of furnishing and household equipment to increase by 1.4% (0.05%).

Housing will remain in its position as one of the key drivers of the CPI increase. According to our forecast, imputed rent will rise by 0.4% (0.08% CPI effect). University fees will rise as well, owing to statutory amendments that raised the cap on public universities’ registration fees from ISK 75,000 to ISK 100,000. We estimate that this will push the CPI upwards by 0.07%.

Will the eclipse push the price level higher?

There has been speculation recently about whether inflation measurements will be affected by the total solar eclipse, which will take place during SI’s price measurement week. According to our measurements, it is possible that the eclipse-related spike in demand has fuelled price hikes in isolated parts of the tourism industry, particularly the hospitality sector. The impact does not appear overly strong, however, and the tourism industry currently accounts for 6.5% of the CPI. In any event, it is important to remember that such effects would probably be temporary. If the eclipse has fostered price hikes, they can be expected to reverse to a large extent in September.

We project that the price of restaurant and accommodation services will rise by 0.85% (0.05% CPI effect).

We project that the price of restaurant and accommodation services will rise by 0.85% (0.05% CPI effect). While this is not an outrageous increase, it is larger than those seen in August of 2025 and 2024. Furthermore, our measurements suggest that the seasonal dip in airfares will be smaller than we projected in our preliminary forecast. We expect a 7% MoM decline in airfares (-0.25% CPI effect), and we anticipate a marginal rise in fuel prices after last month’s drop. Since the last measurements were taken, global oil prices have shot upwards again, owing to the failure of peace negotiations between the US and Iran.

Assumptions underlying wage agreements will fail

In recent months, most indicators have implied that the assumptions underlying the so-called stability agreements will fail when contracts are reviewed in September. It is quite clear that August’s headline inflation measurement will be above the 4.7% threshold provided for in the agreements. According to our forecast, inflation will measure 5.6%, nearly a percentage point above that threshold. This will trigger a review of the contracts, and if the contracting parties cannot agree on a response, the wage contracts can be terminated. The contracts in question will remain in effect until January 2028, so there is still more than a year left before they expire. In their current form, the agreements provide for a negotiated pay rise at the end of this year, plus possible pay scale supplements and productivity supplements.

Inflation to remain stubborn

As is noted above, we forecast that inflation will jump to 5.6% in August, and if so, it will be Iceland’s highest headline rate since August 2024. We expect it to remain around that level for the rest of the year before starting to recede in the early months of 2027.

Developments over the months to come are due partly to base effects, as favourable index measurements from 2025 are set to drop out of twelve-month inflation. Two other upward-pushing items are the expiry of the temporary reduction in value-added tax on fuel and the increase in standard fees for healthcare centre visits, which takes effect in September.

The inflation outlook for the months ahead is as follows:

• September: CPI to rise 0.2% (twelve-month inflation 5.7%) – temporary Government measures will expire and value-added tax on petrol will rise. The increase in standard fees for healthcare centre visits will push upwards as well. This will be offset by a drop in airfares.
• October: CPI to rise 0.25% (twelve-month inflation 5.4%) – seasonal effects taper off, and most items rise marginally.
• November: CPI to fall 0.4% (twelve-month inflation 5.5%) – Singles Day will fall during the price measurement week. Airfares will drop. Despite the November decline in the CPI, headline inflation will inch upwards, as the unusually favourable November 2025 measurement will drop out of the twelve-month comparison.

The CBI’s next interest rate decision is scheduled for next week, on 19 August. Although the Monetary Policy Committee (MPC) will not have the August inflation measurement in hand, the CBI will issue its new macroeconomic and inflation forecast concurrent with the decision. In our newly published forecast, we project that the MPC will raise the policy rate by 0.25 percentage points. Intractable inflation and high inflation expectations are major factors in that assessment.

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