Housing component the main driver of inflation

The housing component will be the main driver of inflation this month, rising by 0.6% MoM and pushing the CPI upwards by 0.18%. Imputed rent, which weighs heaviest in the housing component, is set to rise by 0.7%, increasing the CPI by 0.14%. It has risen by 0.9% MoM for two months in a row, far in excess of forecasts. Rent prices have risen faster than house prices in the past few quarters, but the Housing and Construction Authority’s (HMS) rent price index has been virtually unchanged recently. Analysts have found this component difficult to predict, and in our assessment it is one of the biggest uncertainties in our short-term forecast.

Airfares fall, other items rise

Apart from the housing component, this month’s inflation measurement should not contain much in the way of big news. Airfares will push the index downwards, as they generally do in November, while other items will inch upwards between months.

Nevertheless, we expect the November dip in airfares to be smaller than usual because of airline Play’s insolvency. According to our measurement, air transport prices will fall by 5.5%, lowering the CPI by 0.13%. In addition, fuel prices will ease by 0.15%, continuing the recent downward trend mirroring the fall in the price of Brent crude, which currently stands at USD 63-64 per barrel.

Clothing and footwear prices will fall by 0.1%, shaving 0.01% off the CPI, probably because of special discount days that originate in the US and have become popular in Iceland. This week, which happens to be Statistics Iceland’s (SI) price measurement week, includes Singles’ Day, a phenomenon that could affect the price of clothing, footwear, and more.

Other key items will rise marginally in price in November. Chief among them is recreation and culture, which we expect to climb 0.3% and push the CPI upwards by 0.03%. Furniture and housewares prices will rise 0.2%, increasing the CPI by 0.01%, and other goods and services are set to rise in price by 0.2%, also increasing the index by 0.01%.

Inflation to remain rooted in place?

Headline inflation rose more than expected last month, from 4.1% to 4.3%. What took us most by surprise was the surge in imputed rent, which has prompted us to revise our forecast upwards and has exacerbated uncertainty about the housing component. Our preliminary forecast for the months ahead is as follows:

• December: CPI to rise 0.4% (twelve-month inflation 4.3%) – Airfares spike during the holidays. Other items rise as well.
• January: CPI to fall 0.1% (twelve-month inflation 4.5%) – Price list hikes and unit-based increases offset seasonal sales and falling airfares.
• February: CPI to rise 0.7% (twelve-month inflation 4.3%) – End of seasonal sales for most key items.

Inflation has been persistent, holding virtually unchanged at roughly 4% for this entire year. It now looks set to measure about 4.3-4.5% in the months ahead and remain entrenched just above the 4% upper deviation threshold of the inflation target. In our opinion, the uncertainty in our forecast is concentrated on the upside. The housing component could rise more than we have projected, as could other items that surged unexpectedly last month – food, for instance. All measures of underlying inflation rose in October, which is real cause for concern.

Even so, our long-term forecast assumes that headline inflation will start falling again in H1/2026. We project that it will average 4% in 2026 and 3.7% in 2027. Thus it will still be far from the Central Bank’s (CBI) inflation target, according to our forecast. We expect the CBI’s Monetary Policy Committee to keep the policy interest rate unchanged next week. We explain the rationale behind this projection in our newly released policy rate forecast. It will clearly be difficult to bring inflation back to target in the coming term.

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