Transportation is the most salient uncertainty

New legislation on the aforementioned per-kilometre charge entered into force at the turn of the year, and it is unclear how it will affect the CPI. Analysts have said bluntly that there is profound uncertainty surrounding the change in taxation of motor vehicles. SI has said likewise that the situation is not only uncertain but virtually without precedent. As a result, it is difficult to measure the effects of the new legislative framework with any accuracy, and it can be said that analysts are flying blind as they try to estimate the effects of the per-kilometre charge on the CPI measurement.

SI will classify the per-kilometre charge as a road tax, as the fee itself depends on road usage. Because road taxes in the CPI have heretofore been reflected almost solely in parking fees and tolls for tunnels, they have therefore carried little weight in the index. It is obvious that this component’s weight in the index will increase markedly – probably at the expense of fuel costs, which have fallen steeply because of the cancellation of excise taxes.

Amendments to legislation on motor vehicle excise taxes also entered into force at the turn of the year. Excise taxes on electric vehicles will be cancelled, but this will be offset by a decline in e-vehicle subsidies from ISK 900,000 to ISK 500,000. In addition, excise taxes on petrol- and diesel-powered cars will rise sharply.

Per-kilometre charges and excise taxes

According to our measurement, fuel prices will fall by 29%, and because of the reduction in the weight of fuel in the CPI, the index will fall by 0.67%. On the other hand, we project that the per-kilometre charge will push the index upwards by 0.76%. Based on these assumptions, the changes in the two fees will have a total CPI effect of 0.09%. This accords with the estimates prepared by the Ministry of Finance and Economic Affairs, which projects the overall change at 0.0-0.1%.

Cars will rise in price by 7.5% month-on-month, according to our measurement, pushing the CPI higher by 0.43%. Naturally, electric car prices will rise the least, and some prices will hold steady, while the biggest increase will be in the price of cars powered by fossil fuels. The overall rise in the measurement is mitigated by the fact that electric vehicles account for the vast majority of households’ car purchases. This assumption about car prices is the main reason we have revised our forecast for January upwards relative to our preliminary forecast, as car prices look set to rise more at the start of 2026 than we had anticipated.

January sales and reduced airfares

As is typical for January, post-holiday sales are in full swing, and they appear to be similar in scope and depth than they were a year ago. We project that Clothing and footwear will fall in price by 7.7% (-29% CPI effect). Furthermore, we expect the furniture component (now called Furnishings, household equipment, and routine household maintenance) to fall 4.8% (-0.23%).

The yearly post-holiday plunge in airfares is in place as well. Airfares jumped 27% in December, far more than usual. According to our measurement, they will fall by just under 17% in January, lowering the CPI by 0.33%.

Other upward-pushing items

Price hikes on various items take effect at the start of the new year. Chief among these is tobacco and alcoholic beverages, with a 3.6% MoM (0.09% CPI effect) in January, owing to an increase in unit levies. Fee schedule increases are spread across a range of categories, including Education, up 1.2% (0.02%), and food, up 0.3% (0.05%). Much to our surprise, food prices fell in December.

The housing component as a whole will increase by 0.5% (0.15% CPI effect), according to our forecast, Major changes in the rental market took effect at the beginning of 2026, including provisions prohibiting price indexation of short-term leases and setting more stringent rules on rent increases. The next few months’ developments in rent prices will be under close scrutiny because of this.

A new classification system

SI began using a new CPI classification system at the turn of the year, and in the future, inflation figures will be published according to the new system. This update will make the categories in the consumption basket more accurate and the boundaries between goods and services clearer.

The most obvious visible change is the addition of a new overall category, Insurance and financial services, bringing the total number of categories to 13 instead of the previous 12. The names of some categories have been changed, and in response to changing times, some subcategories have been moved to new overall categories. Further information on the new classification system can be found here.

The inflation outlook for the months ahead

Headline inflation has been nothing if not dramatic recently. It fell to its lowest point in five years in November, only to turn tail in December and catapult far above forecasts, to 4.5%. And in January, the outlook is for an even further increase. If our forecast materialises and inflation hits 4.9%, it will be Iceland’s highest inflation rate since October 2024.

If we look at the bright side and our forecast turns out close to accurate, the January increase is due mostly to the new legislation on motor vehicles and not to underlying inflationary pressures. Nevertheless, it is cause for genuine concern that inflation should be approaching the 5% threshold that would trigger a review of the stability agreements. If, at the end of summer, inflation is above the level stipulated in the so-called assumptions clause in the agreements, the contracting parties are authorised to demand a review. The outlook further ahead is for declining inflation, however. Our preliminary forecast is as follows:

• February: CPI to rise 0.7% (twelve-month inflation 4.7%) – End of seasonal sales for most key items.
• March: CPI to rise 0.6% (twelve-month inflation 4.9%) – Seasonal sales reverse in full, airfares rise during the run-up to Easter.
• April: CPI to rise 0.3% (twelve-month inflation 4.2%) – Slight increases in most items, more modest rise in airfares due to the timing of Easter.

Inflation will fluctuate in March and April because of the timing of the Easter holidays. If this preliminary forecast materialises, headline inflation will measure 4.2% in April. In that case, it would still be above the 4% deviation threshold of the CBI’s inflation target and far above the 2.5% target itself. The MPC’s next interest rate decision will be announced on 4 February, and the Committee’s task will be a thorny one: how to weigh obvious signs of a cooling economy against persistent inflation.

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