Partial end-of-sale effects

This year’s January sales were broadly as we had assumed. The January discounts will probably reverse in February, although some of the end-of-sale effects could stretch into next month. In some stores, the final days of winter sales were still ongoing during SI’s price measurement week. We project that clothing and footwear prices will rise 4.4% (0.15% CPI effect) and the price of furniture, housewares, etc. will increase by 4.5% (0.18% CPI effect).

Housing an innocent bystander this time?

The housing category is set to rise by 0.5% MoM (0.14% CPI effect), according to our forecast. The main driver of the increase in imputed rent, which will rise by 0.4% (0.08%), about the same as last month. According to the rent price index compiled by the Housing and Construction Authority (HMS), the rental market has been tranquil in the recent past. That said, prices in the market have been fluctuating in the past few months, but we expect them to rise modestly in the months to come. The hike in waste collection fees will also have an impact in February, as many municipalities’ increases took effect at the start of the month.

Other upward-pushing CPI categories

Our measurements suggest that airfares will rise by 4.2% MoM (0.01% CPI effect), owing to seasonal effects following the annual drop in airfares in January. Presumably, airfares will have a fluctuating impact on twelve-month inflation in the next few months, as fares will probably rise the most in March instead of in April, owing to the timing of Easter.

The price of food and beverages rose unexpectedly by 1% in January, with the increase distributed across most subcategories. We expect food price inflation to ease in February, to 0.3% MoM (0.05% CPI effect).

The inflation outlook further ahead

Twelve-month inflation hit 5.2% in January, its highest since September 2024. The main driver of the spike was the rise in public levies, although other items increased as well. According to the fixed-tax index of consumer prices – which is SI’s estimate of the CPI excluding changes in taxes and fees on consumer goods and services – inflation would have measured 4.8% in January. The outlook is for inflation to taper off in coming months but remain above the 4% upper deviation threshold of the Central Bank’s (CBI) target until mid-year. Our preliminary forecast for the next three months is as follows:

• March – CPI to rise 0.6% (twelve-month inflation 5.2%) – Winter sales reverse in full; airlines rise during the run-up to Easter
• April – CPI to rise 0.3% (twelve-month inflation 4.5%) – Minor increase in most items; smaller rise in airfares because of the timing of Easter
• May – CPI to rise 0.2% (twelve-month inflation 4.5%) – Minor increase in most items; airfares ease slightly

If our preliminary forecast materialises, headline inflation will measure 4.5% in May. While this is well below its current level, it is still far from the CBI’s 2.5% inflation target. Fortunately, we expect inflation to fall even further in the latter half of the year. Our long-term forecast assumes that it will average 4.3% in 2026 as a whole. This exceeds the projection in our late-January forecast, mainly because January inflation turned out higher than expected.

Inflation has been above the CBI’s 2.5% target since mid-2020, and it seems that the final leg of the journey back to target is going to be an uphill battle. We do not expect inflation to reach the target in the near term, all else being equal, but in order for it to do so, the economy will need a hard landing, for instance, or rent prices will have to hold steady for a while.

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