Vestiges of end-of-sale effects and a marginal rise in airfares

End-of-sale effects will stretch into March, as post-holiday discounts did not reverse in full in February. We expect clothing and footwear prices to rise by 4.3% (0.15% CPI effect), thereby contributing the most to the month’s increase in the CPI. Sales on furniture and housewares did reverse fully in February, though, making large price hikes on those items unlikely.

Airfares fell unusually steeply in January but then only rose modestly in February. As a result, we expect fares to keep rising slowly this month and next, rebalancing to a large degree before Easter, which comes in late April. We forecast that airfares will rise by 4.1% (0.07%) in March. The price of fuel, which also falls under the travel and transport component, fuel, is set to decline by 0.8% in March (-0.03%), according to our forecast, after rising for three months in a row. The past few weeks’ marked drop in global fuel prices is a factor in this projection.

Other items

Various signs of a calmer housing market have come to the fore recently, although it is wise to refrain from drawing sweeping conclusions based on a few measurements. We project that imputed rent will rise by 0.4% MoM in March (0.08% CPI effect). It rose by 2.1% (0.4%) in March 2024, and base effects from this subcomponent explain a fair share of the decline in headline inflation.

Various increases in food production costs made their presence felt when the price of food and beverages rose more than we anticipated in February. We expect food prices to rise far less in March, though. In all, we project a 0.35% (0.05%) increase in the food and beverages component.

What’s next?

Recently concluded public sector wage agreements with teachers could affect inflation further ahead, although they have eliminated some of the uncertainty associated with the dispute between the parties. The impact of the contracts will probably be limited at first, centring mainly on stronger purchasing power for the worker group concerned and perhaps a slightly more accommodative fiscal stance. Over time, though, wage drift could increase as a result, and in our assessment, there is elevated uncertainty about what lies in store when the current contracts expire. In coming months, we expect a more tranquil housing market, a stable ISK, and greater price stability abroad to foster continued disinflation.

We expect headline inflation to keep falling until the summer, albeit at a reduced pace. This autumn, the outlook is for a slight uptick in inflation when the impact of last year’s cancellation of school fees drops out of twelve-month measurements. Our preliminary forecast is as follows:

• April – CPI to rise 0.6% (twelve-month inflation 3.9%)
• May – CPI to rise 0.3% (twelve-month inflation 3.6%)
• June – CPI to rise 0.4% (twelve-month inflation 3.6%)

In order for our forecast to materialise, wage drift must be limited and the ISK exchange rate must remain stable. In addition, backlash from a possible trade war could cause a setback, as the situation on that front is highly uncertain at present.

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