Seasonal effects front and centre 

Summer sales and other seasonal factors will be the main drivers of developments in the CPI in July, as is typical for this time of year, with sales pushing downwards and hikes in airfares and other tourism-related items pulling in the opposite direction. 

Transport will be the main upward-pushing item in the July measurement. We expect airfares to rise by 14% MoM (0.46% CPI effect), which is smaller than usual for July. The relatively modest increase stems partly from the surge in airfares in June and the recent decline in jet fuel prices. On the other hand, petrol prices will fall by 2.8% MoM (-0.08% CPI effect), according to our forecast. 

Summer sales are shaping up similar to those in the past two years but will be considerably shallower than during the pre-pandemic period. In those days, clothing and footwear prices often tumbled by 10% or more in July, but in the past few years the discounts have been far smaller. For this year, we project that clothing and footwear prices will fall by 5.1% (-0.18%) and that the price of furnishings and household equipment will decline by 2.2% (-0.09%). 

Imputed rent weighs heavily in inflation 

According to our forecast, the housing component will be the second-strongest driver of this month’s CPI increase, and within that component, imputed rent will carry the most weight. We expect imputed rent to rise by 0.5% MoM (0.10% CPI effect). It has been climbing faster in the past three months than in the period beforehand. In 2026 to date it is up nearly 3%, although it is outpaced by the rent price index, which had increased by 3.5% over the first five months of the year (June figures have not yet been published).

Uncertainty about developments in imported goods prices 

Our forecast indicates that food prices will rise by 0.4% (0.06% CPI effect). This is broadly in line with developments in the Icelandic Federation of Labour’s (ASÍ) grocery price index, which is up 0.3% MoM as of this writing. It will be interesting to keep track of developments in the price of food and other imported goods in the near future. Peace negotiations between the US and Iran are fragile, and in fact, as of this writing, it is uncertain whether discussions are still ongoing. Petrol prices plunged just after the parties agreed on a memorandum of understanding providing for a ceasefire, but they have been on the rise again in the wake of reports that the negotiations have run aground. In our opinion, the full effects of the war on imported goods prices have yet to emerge. Even if the fighting stops, it will take some time for supply chains and transit routes to return to normal. 

Assumptions clause triggered 

Inflation ticked upwards in June, to the current 5.2%, slightly above our forecast. The main difference between our forecast and SI’s measurement was that airfares rose considerably more than we had assumed. Headline inflation has now measured above 5% for all of 2026 and seems likely to remain there for the time being. Our projections for the months ahead are as follows: 

• August: CPI to rise 0.05% (twelve-month inflation 5.4%) – End-of-sale effects push upwards; lower airfares pull downwards. The increase in standard fees for healthcare centre visits will push upwards as well. 
• September: CPI to rise 0.20% (twelve-month inflation 5.5%) – temporary Government measures will expire and value-added tax on petrol will rise. This will be offset by a drop in airfares.
• October: CPI to rise 0.25% (twelve-month inflation 5.3%) – seasonal effects taper off, and most items rise marginally. 

According to our forecast, headline inflation will measure 5.4% in August, well above the 4.7% threshold set for a wage agreement review, as we have discussed recently. In all probability, twelve-month inflation will rise in August and September, in spite of relatively modest MoM increases. This is due mainly to base effects, as the CPI fell in August 2025 and rose only slightly in September of that year. The temporary measures introduced by the Government will expire this September, thereby nudging the CPI higher.

The MPC’s next policy rate decision will be announced on 19 August; therefore, the July measurement will be the most recent one available to the Committee when it meets next month. Even though the economy has cooled, inflation is still entrenched and inflation expectations remain high. We think it likely that the MPC will raise interest rates at its next meeting, as we projected in our most recent macroeconomic forecast.

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