Lower airfares and end-of-sale effects

Airfares generally rise over the summer, fuelled by the peak tourist season and Icelanders’ overseas travel. This summer’s increase was unusually large, at 32.5% for June and July combined. Clearly, demand for air travel was strong, with Icelandic Tourist Board data showing an all-time single-month record of over 300,000 foreign nationals departing Iceland in July.

After the past two months’ seasonal spike, the outlook is for airfares to ease in the two months ahead. According to our forecast, air transport prices will fall by 7.3% MoM (-0.22% CPI effect) in August, and even more in September. We also expect fuel prices to keep falling. Our measurements suggest a MoM decline of 0.7% (-0.03%) in August.

July sales were slightly shallower than we had anticipated, mainly affecting clothing and footwear prices. End-of-sale effects in August should be more modest as a result. According to our forecast, clothing and footwear prices will rise by 2.4% MoM (0.08% CPI effect) and furniture and housewares prices by 1.3% (0.06%). End-of-sale effects will stretch into September.

Has food price inflation run aground?

In a newsworthy shift, food and beverage prices held virtually flat MoM in July. They have risen by 4.4% in 2025 to date, probably due to contractual pay increases, which we believe have largely come to the fore. The wage rises have been counterbalanced by the appreciation of the króna in the recent past.

As the heading above indicates, we project that food prices will hold broadly steady between July and August. According to the Icelandic Federation of Labour’s (ASÍ) grocery price index, prices will decline by 0.09% between the two months. The index correlates relatively well with SI’s measurement of food and beverage prices, as the chart below illustrates.

According to our forecast, imputed rent will be the main driver of this month’s rise in the CPI. This is nothing new, as imputed rent accounts for 20% of the index, making it the weightiest of all subcomponents. We project that it will rise by 0.5% (0.10% CPI effect) in August.

Inflation set to rise in coming months

We have repeatedly mentioned the one-off items from last autumn that will soon drop out of twelve-month inflation measurements. The effects of last year’s cancellation of fees at several universities, which lowered the subcomponent by 21%, is set to drop out of twelve-month measurements this August. Pulling in the opposite direction, this month’s hikes in key CPI components will be smaller than usual, probably due to the stronger ISK. If our forecast materialises, inflation will rise by only 0.1%, to 4.1%, even though this oft- cited one-off item will stop affecting twelve-month measurements. In September, however, we expect inflation to rise still further. Our preliminary forecast for the next few months is as follows:

• September: CPI to rise 0.1% (twelve-month inflation 4.5%) – Continued end-of-sale effects, mitigated by a sizeable drop in airfares. Various price hikes due to fee schedule revisions. Free primary school meals drop out of twelve-month measurements.
• October: CPI to rise 0.3% (twelve-month inflation 4.5%) – 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 4.6%) – Airfares fall, offsetting rises in other key items.

In our opinion, the biggest near-term uncertainty lies in imputed rent. Hopefully, imputed rent will become easier to forecast as experience is gained with SI’s new calculation method. We do not assume substantial hikes in rent prices in the months just ahead.

Our forecast indicates that inflation will measure 4.6% in November, which gives cause for significant concern. It has proven difficult to bring inflation much lower than 4%, the upper deviation threshold of the Central Bank’s (CBI) inflation target. The CBI’s Monetary Policy Committee is meeting at the beginning of next week and will publish its policy rate decision on Wednesday. July inflation figures and forecasts for August will be the most recent inflation data the Committee will have in hand. ÍSB Research will publish its policy rate forecast in the next few days.

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