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Inflation forecast: Headline inflation levels off

Rising house prices are the main reason headline inflation will not fall in October, according to our forecast. We expect inflation to remain broadly unchanged in coming months and then fall more decisively after the turn of the year.

We project that the consumer price index (CPI) will rise by 0.7% month-on-month in October. If this forecast materialises, twelve-month inflation will remain unchanged at 8.0%. According to our forecast, inflation will hold broadly steady in coming months and then fall rather quickly in early 2024. The main upward-pushing items this month are house prices, as well as airfares and fuel prices, which will also increase MoM. Statistics Iceland (SI) will publish the CPI for the month on 30 October.

House prices on the rise

Although the housing market is far calmer than it was a year ago, prices are still fluctuating, which affects the CPI. According to the house price index, property prices have risen in the past two months. According to the index value published yesterday, house prices were up 1.4% MoM in September, the largest single-month increase since summer 2022, apart from March 2023. It is noteworthy that both condominium prices and single-family home prices rose during the month, by 1.4% and 1.6%, respectively. In the price volatility characterising the market in the recent term, single-family home prices have been particularly changeable, owing to the very small number of purchase contracts negotiated during the period. Now, however, condominium prices have risen two months in a row, by a combined 2.3%, which could stem from the more generous authorisations for participating loans that took effect this summer.

Based on the house price index, it can be assumed that the housing market prices published by SI will also rise significantly this month. The only difference between the two indices is that SI also measures prices in regional Iceland. We project that imputed rent will rise by 1.7% (0.32% CPI effect), with market prices rising 1.1% and the interest component by 0.6%.

Other upward-pushing CPI items

Apart from housing, the travel and transport component is the main driver of inflation. Airfares are set to rise by 5.2% (0.10% CPI effect) and fuel prices by 1.5% (0.04%). Food and beverage prices are set to rise by 0.3% (0.05%) and furniture and housewares prices by 0.8% (0.05%). Most other items are likely to rise little, if at all, between months.

The near-term outlook

Inflation ticked upwards last month, to 8.0%. Nevertheless, headline inflation has tapered off after peaking at just over 10% this past February, mainly because of the turnaround in the housing market and lower imported inflation, which in turn was partly due to the appreciation of the ISK. Our forecast of more swiftly declining inflation in 2024 assumes that house prices will rise more slowly. If house prices take off again, however, inflation will probably be quite stubborn. We assume, though, that high interest rates and high inflation will keep the housing market under relative control in the coming term. That said, the past two months’ house price measurements give cause for some concern.

We project that twelve-month inflation will hold broadly steady in coming months. In our last inflation forecast, we assumed a slight MoM decline, but the most recent numbers from the housing market suggest that prices will fall negligibly, if at all, in the next few months. According to our preliminary forecast, the CPI will rise 0.3% in November, 0.6% in December, and 0.4% in January. If this forecast materialises, twelve-month inflation will measure 7.9% in December and 7.5% in January. Inflation will then ease rather quickly in early 2024, when large single-month increases drop out of twelve-month measurements. According to our long-term forecast, inflation will average 5.7% in 2024 and 3.8% in 2025. The main uncertainty in our long-term forecast is wage agreements, which are set to expire one after another in early 2024.


Bergthora Baldursdottir




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