Seasonal price hikes carry the day

According to our forecast, Transport will contribute the most to the increase in the CPI, rising by 1.5% MoM (0.23% CPI effect). This is driven primarily by airfares, which we project to jump 11% MoM (0.29% CPI effect). The spike in airfares is part of the usual seasonal pattern, with travel increasing over the summer and peaking in July. Airfares are likely to rise more in coming months than they would ordinarily, owing to the surge in jet fuel prices, which we include in our preliminary forecast.

Petrol prices will hold steady between months. This is the first time since the outbreak of the Persian Gulf conflict that petrol prices have not risen, apart from last month’s drop due to the decline in value-added tax (VAT) on fuel.

Another category that generally rises over the summer is Restaurants and accommodation services, which, according to our forecast, will rise by 2.6% MoM (0.14% CPI effect).

Is imputed rent picking up the pace again?

Housing is the second-largest contributor to the June increase in the CPI. According to our forecast, the component will rise by 0.6% (0.17% CPI effect), owing mostly to imputed rent, which accounts for about 0.14% of the increase in the CPI. Imputed rent has risen faster in the past two months than in the period beforehand and is up 2.2% in 2026 to date. This is broadly in line with the rent price index, which has nonetheless risen more rapidly thus far in 2026. According to data through April, the year-to-date increase in the rent price index measures 3.1%.

Food prices climbing again

Quite unexpectedly, the price of Food and non-alcoholic beverages has remained flat in the past two months. Our measurement suggests that this will change in June. We project that food will rise in price by 0.5% (0.07%), with the increase spread across most subcomponents. One item that stands out is dairy products, however, as the agricultural pricing committee raised the price paid to farmers in May. The price of imported goods, including food, is likely to rise in coming months as price hikes on imported inputs for food manufacture make landfall in Iceland.

The inflation outlook

Twelve-month inflation tapered slightly in May and now measures 5.1%. The past two months have been surprising in terms of how little the price of imported goods has risen. Underlying inflation according to core indices rose marginally in May, however, suggesting that underlying inflationary pressures are gathering a bit of steam. We expect imported inflationary pressures to be stronger in the months ahead, owing to conditions in global markets, but a slight decline in domestic inflation will pull in the other direction.

• July: CPI to rise 0.3% (twelve-month inflation 4.9%) – Airfares increase for the peak season, while summer sales dampen price hikes for other items.
• August: CPI to rise 0.05% (twelve-month inflation 5.1%) – End-of-sale effects counteract lower airfares.
• September: CPI to rise 0.3% (twelve-month inflation 5.3%) – Government measures expire and VAT on fuel rises, while airfares fall.

If our preliminary forecast materialises, headline inflation will measure 5.1% in August, thereby exceeding the wage contract review threshold. In our most recent macroeconomic forecast, we assume that wage agreements will hold but that a modest extra pay hike will be negotiated for 2027.

Looking further ahead, we expect inflation to average around 5% this year. The Persian Gulf conflict will catalyse persistent inflationary pressures in the quarters ahead and delay the disinflation process. Our aforementioned macroeconomic forecast does not assume that inflation will fall to target during the forecast horizon. We project average inflation at 4.3% in 2027 and 3.8% in 2028. Nevertheless, the inflation outlook is still very uncertain, not least as regards the duration and scope of supply chain disruptions.

LEGAL DISCLAIMER

This report is compiled by Islandsbanki Research of  Islandsbanki hf.

The information in this report originates in domestic and international information and news networks that are deemed reliable, along with public information, and Islandsbanki Research’s own processing and estimates at each time. The information has not been independently verified by Islandsbanki which therefore does not guarantee that the information is comprehensive and accurate. The views of the authors can change without notice and Islandsbanki holds no obligation to update, modify or amend this publication if assumptions change.

This publication is only published for informational purposes and shall therefore not be viewed as recommendation/advice to make or not make a particular investment or an offer to buy, sell or subscribe to specific financial instruments. Islandsbanki and its employees are not responsible for transactions that may be carried out based on information put forth in the report. Before making an investment decision, recipients are urged to seek expert advice and get well acquainted with the investments market and different investment alternatives. There are always financial risks related to investment activities, including risk due to international investments and fluctuations in the exchange rate of currencies. Investors’ investment objectives and financial position vary. Past performance does not indicate nor guarantee future performance of an investment.

The research report and other information received from Islandsbanki are meant for private use only. The materials may not be copied, quote or distributed, in part or in whole, without written permission from Islandsbanki.

This report is a short compilation and should not be considered to contain all available information on the subject it discusses.

Supervisory body: The Financial Supervisory Authority of Iceland (www.fme.is).

UNITED STATES

This report or copies of it must not be distributed in the United States or to recipients who are citizens of the United States against restrictions stated in the United States legislation. Distributing the report in the United States might be seen as a breach of these laws.

CANADA

The information provided in this publication is not intended to be distributed or circulated in any manner in Canada and therefore should not be construed as any kind of financial recommendation or advice provided within the meaning of Canadian securities laws.

OTHER COUNTRIES

Laws and regulations of other countries may also restrict the distribution of this report.

Further information regarding material from Islandsbanki Research can be accessed on the following.