We project that the consumer price index (CPI) will rise by 0.6% month-on-month in April, and that headline inflation will drop sharply, from 6.8% to 6.1%. Imputed rent looks set to be the main driver of the rise in the CPI. We also project that the spike in inflation during the Easter holidays will continue.
Inflation forecast: Inflation set to tumble in April
Twelve-month inflation will fall once again in April and the quarters to come, after a somewhat surprising uptick in March. It will continue to fall in the next several months but will not realign with the Central Bank’s (CBI) inflation target during the forecast horizon, although it will be very close to target in 2026.
Housing component still the main driver of inflation
According to our forecast for April, housing will be the main upward-pushing component during the month. Imputed rent is projected to rise by 1.3% (0.25% CPI effect), partly because of demand pressures relating to the buy-up of homes in Grindavík. In all likelihood, though, demand pressures will subside again over the course of the year. We expect the interest component to contribute 0.5% and house prices the other 0.8% of the April rise in the CPI.
The change in the methodology for calculating imputed rent is also likely to dampen volatility in the CPI, resulting in lower headline inflation figures in H2/2024. The new calculation method, which is based on rent price data instead of prices in real estate transactions plus the interest component, will be brought into use in June. The change in methodology for the calculation of imputed rent is described in greater detail here.
Airfares on the rise
Because the Easter holidays came early this year, the seasonal uptick in airfares occurred in March, but it was smaller than we had anticipated. As a result, we expect a share of the seasonal Eastertide increase to come to the fore in April. We expect airfares to rise by 7% MoM in April (0.12% CPI effect).
The near-term inflation outlook
April 2023 saw a surge in the CPI, but it will now drop out of twelve-month inflation measurements. This is why headline inflation is likely to fall as steeply as we have projected. Our preliminary forecast is as follows:
- May – CPI to rise 0.3% (twelve-month inflation 6.0%)
- June – CPI to rise 0.5% (twelve-month inflation 5.6%)
- July – CPI to rise 0.2% (twelve-month inflation 5.8%)
The key uncertainties in our forecast are the impact of the changed methodology for calculation of imputed rent and the uncertain impact of the Grindavík buyout on housing market prices. Furthermore, it is not yet clear how the summer tourist season will develop. Further discussion of the impact of a weaker tourist season on the economy, the labour market, and the housing market can be found here.
Author
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