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Inflation hits 9.9% in July, its highest in nearly 13 years

Inflation measured 9.9% in July, the highest headline rate since September 2009. House prices are one of the main drivers of the increase, although inflationary pressures are indeed widespread. The outlook is for inflation to remain close to this level for the rest of 2022 and then start to ease as the winter wears on.

According to figures just released by Statistics Iceland (SI), the consumer price index (CPI) rose 1.17% MoM in July, catapulting twelve-month inflation up to 9.9% from the June measurement of 8.8%. This is Iceland’s highest inflation rate since September 2009. The CPI excluding housing rose by 0.94% during the month, and twelve-month inflation thus measured was 7.5%. The latter measurement shows that inflationary pressures stem from various causes, even though house prices are one of the main catalysts at present.

The July measurement is well above official forecasts. We had projected a rise of 0.6% between months, whereas forecasts as a whole lay in the 0.6-0.7% range. The main difference between our forecast and SI’s measurement lies in the unexpectedly big jump in airfares, owing both to a surge in July and to a correction of June figures. The housing component also rose more than we had anticipated. On the other hand, food prices rose less and furniture and housewares sales resulted in deeper price cuts than we had projected.

Airfares and housing the main drivers of inflation in July

International airfares rose by over 38% (0.72% CPI effect) in July, according to SI’s measurement. More than half of that increase is due to actual price hikes during the month, and the remainder is due to the correction of an error in the June measurement. Because of that error, headline inflation measured 8.8% in June, whereas it should have measured 9.1%. SI never revises the CPI retroactively, however, as it would greatly complicate both pricing and settlement of indexed assets and liabilities.

Although the air travel component unexpectedly proved the largest upward-pushing item in July, the housing component made a hefty contribution, as has been the pattern in recent months. In all, the housing component of the CPI rose by 1.9% (0.56% CPI effect). This includes a 2.4% jump in imputed rent, which raised the CPI by another 0.47%, while an increase in paid rent and home heating costs explains the remainder.

House price inflation as measured by SI has kept rising virtually unimpeded. According to the July CPI, house prices were up nationwide by 2.55% month-on-month and 24.8% year-on-year. It is noteworthy that regional Iceland has blown past the capital area in terms of twelve-month house price inflation. In the past year, house prices have risen by over 29% in regional Iceland, while in the capital area, condominium prices have risen by just over 24% and single-family home prices are up nearly 22%. The real estate market has been buoyant in communities on the periphery of greater Reykjavík, as well as in Eyjafjörður, on the outskirts of Akureyri. This probably explains the growing momentum in the market outside the capital area at a time when supply has been increasing in many communities.

Is imported inflation losing steam?

Summer sales were in full swing in mid-July and made quite a mark on various CPI subcomponents. Clothing and footwear prices fell by 6.8% (-0.24% CPI effect), and furniture and housewares prices were down 2.6% (-0.17% CPI effect). But these provide only temporary shelter from the storm, as prices will presumably rise again in August and September, after sales are over and new inventory takes the place of the discounted goods.

More interesting is the modest increase in food and beverage prices, which rose by only 0.15% (0.02% CPI effect), the smallest increase since July 2021. The price of various inputs for food production has fallen considerably in the global market after soaring earlier this year, and we hope these effects are starting to stabilise domestic food prices.

Broad-based inflationary pressures

Inflation stems from numerous sources at present, and pressures are widespread. Of the 9.9% headline inflation figure for this month, 4% stems from housing, 2.2% from imported goods, 1.3% from domestic goods, and 2.4% from services. All of these key items have risen far more than is consistent with the Central Bank’s (CBI) 2.5% inflation target. House prices, other domestic costs such as wages, and imported inflation all combine to push prices up rapidly at the moment.

The near-term outlook is for inflation to remain high, possibly moving into double-digit territory in August. According to our preliminary forecast, the CPI will rise 0.6% in August, 0.4% in September, and 0.5% in October. If these projections materialise, inflation will measure 9.9% in October.

Thereafter, we expect it to lose pace as import prices stabilise, the ISK appreciates, and the housing market rebalances. But it is important to remember that the situation is highly uncertain, and it wouldn’t take much for inflation to prove more persistent than we envision. Not least among the uncertainties is the upcoming round of wage negotiations, although housing supply and foreign factors such as the war in Ukraine and the pandemic in China are uncertain as well.


Jón Bjarki Bentsson

Chief economist