Spike in airfares set to reverse in part

After the annual Easter surge, we expect airfares to subside somewhat in May, owing to reduced demand and lower fuel prices. The drop in airfares will be short-lived, however, as summertime demand will push prices upwards again before they fall once more in the autumn. Overall, we forecast that airfares will fall by 5.2% in May (-0.13% CPI effect) and fuel prices to fall 1.1% (-0.04%). Global oil prices are at their lowest in quite some time, and the outlook is for fuel prices to taper off steadily in coming months. It is also possible that airfares will rise less than usual this summer.

Food and beverage prices set to move higher

Food and beverage prices are up 1.9% year-to-date, driven by higher costs – wage costs in particular – as the general wage index increased by 6.9% in March. We expect food and beverages to rise by 0.6% (0.10%). This is supported by the Icelandic Federation of Labour’s price monitor, with a leading index increase of 0.47%. Furthermore, the agricultural pricing committee decided to increase the minimum price of milk, effective this past Monday. According to the committee’s announcement, this is due to the increased cost of milk production, as wage cost hikes account for 75% of the total increase in the cost of producing milk. Domestic goods have therefore played a leading role in food and beverage price increases in recent months.

Imputed rent

The imputed rent measurement in April took us by surprise with an unexpected 1% MoM increase. Until then, rent had not risen by more than 1% in any given month since the new imputed rent calculation was adopted last summer. We do not expect such measurements in the future, and we assume that imputed rent will rise by about 0.5% per month. For May, we expect it to increase by 0.4% MoM (0.08%). Now that more experience has been gained with the new calculation method, it is fairly clear that month-to-month fluctuations have receded, but on the other hand, forecasting changes in the component has proven more complicated.

Inflation in the months ahead

In April, headline inflation rose for the first time since July 2024, reaching 4.2%. According to this forecast, it will recede again in May, to the aforementioned 3.8%. We also expect continued disinflation in the months just ahead, but with a slight uptick in late summer. Our preliminary forecast for the next few months is as follows:

• June – 0.4% CPI increase (headline inflation 3.7%)
• July – 0.2% CPI increase (headline inflation 3.4%)
• August – 0.3% CPI increase (headline inflation 3.6%)

As these numbers show, inflation will inch upwards between July and August, to 3.6%. At that point, we expect it to fall much more slowly and fluctuate more frequently.

The key short-term uncertainty is the rental market, as last month’s measurement took us unawares. If such increases continue in the next few months, imputed rent will rise faster and inflation will be higher than is forecast here. On the other hand, we expect the ISK to be stable in the near future. If it appreciates further against major currencies, inflation can be expected to fall more rapidly than is projected here.

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