We project that the consumer price index (CPI) will rise by 0.1% month-on-month in September, lowering headline inflation from 6.0% to 5.7%. According to our forecast, inflation will have subsided markedly by the end of the year. Seasonal items will affect the September CPI measurement, which will be similar to the measurement from August. Chief among these seasonal items are end-of-sale effects, which were moderate in August and can be expected to stretch into September. They are offset by the annual drop in airfares, which typically accompanies the decline in the summer tourist season.
Inflation forecast: Headline inflation set to ease in September
Headline inflation will fall in September, according to our forecast. Annually occurring seasonal items will affect the measurements, with end-of-sale effects and lower airfares pulling against one another. A reduction in the cost of school meals weighs in on the downside, while the housing component still weighs heavily on the upside.
Lower airfares make their mark, but end-of-sale effects come to the fore as well
As with the August measurement, lower airfares offset end-of-sale effects. Airfares declined in accordance with our August forecast, and we expect an additional 11.1% drop in September (-0.19% CPI effect). Fuels, another subcomponent of the travel/shipping component, will fall by a full 1.5% (-0.05% CPI effect), according to our measurements. Taken together, these reductions will lower the travel and shipping component by 1.7% (-0.26%) in September.
End-of-sale effects will be stronger in September, as they were relatively modest in August. We project that clothing and footwear prices will rise by 5.2% (0.18% CPI effect) during the month. Furniture and housewares prices will rise less sharply, or by 1% (0.06%), as end-of-sale effects were stronger in August.
Food prices decline, and free school meals are introduced
The Government measures undertaken to facilitate wage agreements early this year will now affect the CPI. The agreements provide for free school meals as of the coming academic year, entailing a marked decline in the education subcomponent, which also fell significantly in August due to the cancellation of fees at several universities. According to our forecast, the price of education will fall by 2.68% (-0.03%), although this estimate is somewhat uncertain.
The price of food and beverages dropped 0.5% (-0.07%) in August, and the outlook is for a continued decline in September, owing to increased competition in the market for groceries. We project a decline of 0.4% (-0.06%) in September. The outlook is for food prices to rise only modestly in coming months, although uncertainty grows greater further out the forecast horizon.
Housing the main driver of inflation, apart from regular annual items
We project that imputed rent will rise by 0.65% month-on-month (0.12% CPI effect). There are still few signs that the rise in rent prices will lose steam in the coming term; therefore, the housing component will continue to be a major driver of inflation in the next several months. On the other hand, because a majority of residential leases are price-indexed, a more gradual rise in the CPI should slow down the indexation-generated rise in rent.
The outlook for the coming winter
Twelve-month inflation measured 6.0% in August, after falling from 6.3% in the previous month. At present, inflation is at its second-lowest level since January 2022. If our forecast materialises, it will realign with its lowest since that time, or 5.7%. Because twelve-month inflation fell more than we expected in August, the outlook for the coming winter has changed somewhat. Our preliminary forecast is as follows:
- October – CPI to rise 0.2% (twelve-month inflation 5.3%)
- November – CPI to rise 0.2% (twelve-month inflation 5.1%)
- December – CPI to rise 0.4% (twelve-month inflation 5.1%)
As before, there are many uncertainties, including the ISK exchange rate, which must hold relatively stable, although it softened slightly in late summer. Inflation has developed favourably in Iceland’s key trading partner countries, and most of them appear to be rebalancing. Inflation has eased and interest rate cuts have either begun or are imminent in these countries, and uncertainty has diminished. For Iceland, the main uncertainty about inflation in coming quarters centres on the planned changes in taxes on motor vehicle operation, set to take effect at the turn of the year, and what impact they will have on measured inflation in 2025. The most likely outcome is that they will lower inflation markedly in January, but this depends on exactly how the changes are implemented.
Analyst
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