Drop in airfares offsets end-of-sale effects

The summer spike in airfares generally reverses in August and September. Fares declined nearly 12% in August, and we expect them to fall by another 13.3% (-0.36% CPI effect) in September. Fuel prices are set to keep easing downwards, with our measurements suggesting a decline of 0.5% (-0.02%) this month.

End-of-sale effects on clothing and footwear prices were very modest in August, after shallow summer sales, which saw prices fell by an unusually moderate 4.9% in July. In August, though, clothing prices increased by only 0.7% MoM, taking us quite by surprise. We therefore project that end-of-sale effects will be strongest in September, with the clothing and footwear component jumping 3.7% (0.13% CPI effect). The price reduction from July will not reverse entirely, however, probably because of the appreciation of the ISK. We forecast that furniture and housewares prices will rise by 1.3% in September (0.06% CPI effect), driven by end-of-sale effects.

Dairy products push food prices higher

Food prices have been quite stable in the past two months, in a shift from the previous pattern. Most likely, the impact of wage increases earlier this year have already passed through to food prices for the most part, and the ISK appreciation is having an effect as well. We project that food prices will rise 0.3% (0.04% CPI effect), mainly because of price hikes on milk and dairy products. The agricultural pricing committee announced an increase in milk and dairy prices, effective at the start of September. Other foods and beverages will rise little, if at all, and the Icelandic Federation of Labour’s (ASÍ) grocery price index suggests that food prices will fall by 0.06% MoM.

Housing and other key items

The housing component as a whole is likely to rise by 0.4% (0.13%) MoM, owing largely to imputed rent, which increases by 0.45% (0.09%), according to our forecast. We also expect paid rent to rise by 0.9% (0.03%), in line with the pace set in recent months. Imputed rent has risen only modestly in the past two months. We expect that trend to continue in the near term, as the housing market is rather tame at the moment, although fluctuations in imputed rent are always a possibility.

Other items that will rise in price this month are recreation and culture, up 0.6% (0.07% CPI effect), and other goods and services, up 0.5% (0.02%). Hotel and restaurant prices will fall by 0.3% MoM (-0.02% CPI effect).

Inflation at or above the upper deviation threshold in the months to come

Headline inflation eased in August, in defiance of forecasts, and now measures 3.8%. This positive development in August changed the near-term outlook somewhat, and we now expect lower headline inflation in the months ahead. Even so, the outlook is for an uptick in September, with inflation at or above the 4% deviation threshold through the autumn. Our preliminary forecast for the months ahead is as follows:

• October: CPI to rise 0.3% (twelve-month inflation 4.2%) – Seasonal effects have tapered off. Most items pull in the same direction, increasing marginally. Headline inflation holds steady MoM.
• November: CPI to rise 0.2% (twelve-month inflation 4.3%) – Airfares fall, offsetting rises in other key items. Inflation ticks upwards slightly.
• December: CPI to rise 0.4% (twelve-month inflation 4.3%) – Airfares spike during the holidays. Other items increase marginally. Headline inflation holds steady MoM.

Twelve-month inflation will therefore hover around 4.2-4.3% in the next several months, according to our forecast, remaining just above the CBI’s 4% upper threshold. This is a more favourable outcome than we anticipated in August, but a far higher end-2025 inflation rate than was expected earlier this year. Headline inflation is clinging stubbornly to the upper deviation threshold and has measured 4% or more for virtually all of this year. ÍSB Research will publish a long-term inflation forecast together with its macroeconomic forecast later this month.

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 website: http://www.islandsbanki.is.