Fuel prices up – airfares down

Temporary Government measures expired at the beginning of the month, and value-added tax on fuel rose from 11% to 24%. This alone pushes fuel prices up by 12%. In addition, global oil prices have shot upwards in recent weeks. In mid-August, Brent crude was selling at USD 90 per barrel, but as of this writing it is up to USD 105.

According to our measurement, fuel prices will jump 16.2% MoM (0.43% CPI effect). Further price hikes are likely to hit the petrol pump in the weeks ahead unless oil prices retreat again. The resumption of oil price increases gives cause for concern, as high prices not only affect fuel costs but also spread to other CPI subcomponents over time.

The rise in fuel prices is offset by a reduction in airfares in September. This is part of the seasonal cycle in which airfares soar during the peak tourist season and then settle down afterwards. According to our price measurement, airfares will fall by just under 15% MoM in September (-0.49% CPI effect).

Healthcare fees rise

The standard fee for a healthcare centre visit doubled this month, from ISK 500 to ISK 1,000. Furthermore, the fee for visits outside regular working hours rose from ISK 3,100 to ISK 3,500, and fees for doctor visits outside healthcare centres were increased as well. These changes affect the subcomponent “other outpatient care services”, but it is unclear how strong the effects will be, as information on the weight of specific items within that subcomponent is lacking.

We expect the health component to rise by 2.0% (0.08%) between months. According to information from SI, changes in fees for visits to physiotherapists, speech therapists, and occupational therapists will not show in the CPI until the October measurement. As a result, we expect the health component to keep rising in October, when those changes come to the fore.

End-of-sale effects and costlier dairy products

End-of-sale effects will continue to surface in September, after a partial reversal of summertime discounts in August. The price of clothing and footwear fell by 4.7% in July but rose by 2.8% in August. We project an additional increase of 2.6% (0.09%) in September. We also expect the price of furnishing and household equipment to increase by 1.1% (0.04%).

We forecast that food and non-alcoholic beverage prices will rise by 0.3% MoM (0.04%), driven mainly by hikes in dairy product prices, as the agricultural pricing committee recently increased the wholesale price of milk and dairy products by 1.42%. Changes in the price of other foodstuffs are modest on the whole, however. According to the Icelandic Federation of Labour, the price of the goods basket has fallen marginally in September. We interpret this with caution, as the decline appears to stem largely from price changes at a single grocery store chain, Nettó.

Housing continues to weigh heavily

We project that the housing component of the CPI will rise by 0.4%, raising the CPI by 0.13%. Imputed rent weighs heaviest in the housing component, and we expect it to rise by 0.5% MoM (0.10%). Developments in imputed rent remain an uncertainty in the inflation forecast, as relatively small changes in that subcomponent can have a strong impact on the overall measurement.

Gradual disinflation ahead

Our forecast assumes that headline inflation will measure 5.9% in September. This is more than we projected in our preliminary forecast, mainly because of the spike in global oil prices. If our preliminary forecast materialises, inflation will remain at a similar level in the months ahead but then taper slightly as the winder advances:

• October: CPI rises by 0.3%; twelve-month inflation eases to 5.7%. Fees for physiotherapy, speech therapy, and occupational therapy increase. Other items pull in the same direction, rising slightly.
• November: CPI falls by 0.4%; twelve-month inflation measures 5.8%. Singles Day falls within SI’s price collection week. Airfares are expected to decline.
• December: CPI rises by 0.85%; twelve-month inflation measures 5.5%. The effects of discount days reverse for the most part, and the seasonal rise in airfares pushes upwards as well.

The forecast is subject to some uncertainty. Key uncertainties centre on how much impact changes in fees for outpatient healthcare services affect the CPI. There is also considerable uncertainty about oil prices and whether a decline is in the offing. If oil prices remain high for a long period, it could affect other CPI subcomponents more strongly in coming months than we have forecast here. Even though headline inflation looks set to be higher in coming months, we expect underlying developments to be broadly unchanged, as the increase just ahead is due primarily to temporary factors.

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