We project that the consumer price index (CPI) will rise by 0.6% month-on-month in April, lowering headline inflation from 9.8% to 9.1%. This month’s rise in the CPI is due mainly to higher dairy product prices and airfares. We project that inflation peaked this February and will continue to fall in the months to come. Statistics Iceland (SI) will publish the CPI for the month on 27 April.
Inflation forecast: Inflation 9.1% in April
Twelve-month inflation will subside markedly in April, according to our forecast. We are of the view that it peaked in February and will continue to fall in the months to come.
Key upward-pushing items
The main upward-pushing item in April is airfares, which are set to rise 9.3% month-on-month (0.19% CPI effect). Airfares rose 4.5% in March, and our measurements suggest that they will keep climbing in April, as is customary during the run-up to the summer peak. The price of motor vehicles and petrol will decline marginally between months, but not enough to make a discernible impact on the CPI.
Food prices also contribute significantly to the month’s increase in the CPI, rising by 1% (0.16% CPI effect). Of that amount, dairy products account for about 0.11% of the increase. On 1 April 2023, the agricultural pricing committee announced an increase in the price paid to dairy farmers, which usually passes straight through retail prices. With the exception of this uptick in dairy prices, it appears that other food and beverage prices are rising more slowly than in the recent past – certainly a change for the better, and hopefully a sign of things to come.
Other key items that increase MoM are hotel and restaurant services (0.04% CPI effect) and furniture and housewares (0.03%).
Housing market cool but not frozen
The housing market has cooled significantly but appears not to be frozen solid, as we discussed here. Last month’s figures took us a bit by surprise, as condominium prices in greater Reykjavík rose by 0.3% MoM. We expect a broadly similar uptick in April, with imputed rent rising by 0.7% (0.14% CPI effect), owing to a slight rise in the market price of housing (0.1%) and an increase of 0.6% in the interest component.
Near-term inflation forecast
Headline inflation measured 9.8% in March, down from the February measurement of 10.2%, which will probably turn out to be the peak, all else remaining equal. According to our preliminary forecast, the CPI will rise 0.4% in May, 0.6% June, and 0.3% in July, leaving headline inflation at 6.9% in July, if our forecast materialises. For 2023 as a whole, we expect inflation to average 8.1%.
A highly positive aspect of March inflation figures is that core inflation, which excludes volatile items, declined by all measures except one. The Central Bank’s (CBI) Monetary Policy Committee pays close attention to these numbers in its assessment of underlying inflationary pressures and will probably be quite relieved to see the downward trend. A continuation of that trend makes it likelier that the CBI’s monetary tightening phase will soon come to an end.
As we know, uncertainty is still pronounced, and financial analysts’ inflation forecasts have been less accurate than usual in the recent past. Nevertheless, we remain optimistic that inflation will continue to ease in the coming term, and we expect it to fall relatively quickly as months with hefty increases drop out of twelve-month measurements. But the journey ahead is still a long one, and a number of factors must be in sync in order to bring inflation back to the CBI’s 2.5% target. According to our long-term forecast, inflation will average 4.5% in 2024 and 3.3% in 2025.
This report is compiled by Islandsbanki Research of Islandsbanki hf.
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