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Inflation holds stable

We forecast that the consumer price index (CPI) will rise by 0.3% month-on-month in April, and that twelve-month inflation will measure 2.0%, down from 2.1% in March. Inflation will therefore remain below the Central Bank’s (CBI) inflation target and appears set to stay there for the present.


  • We forecast a 0.3% rise in the CPI in April

  • Inflation to fall from 2.1 % to 2.0%

  • Housing component pushes upwards

  • Petrol prices fall, as in recent months

  • Inflation to pick up starting at mid-year

  • ISK depreciation the main uncertainty

The markets are highly uncertain at present, and the ISK has depreciated by an average of 13% year-to-date against major currencies, owing to the COVID-19 pandemic. We therefore forecast that inflation will start to pick up around mid-year, measuring 2.6% at the beginning of 2021. It will then ease once again and average just below the CBI’s inflation target in 2021 as a whole. Statistics Iceland (SI) is scheduled to publish the April CPI at 9:00 hrs. on 29 April.

Challenges in measuring the CPI

In a recent press release, SI noted that measuring the CPI would be particularly challenging in April and the months thereafter, for as long as the COVID-19 pandemic lasts. During the ban on gatherings imposed by the authorities, various goods and services will be temporarily unavailable. SI stresses that the weights in the CPI will not be changed as a result of the pandemic, as it is a temporary situation that will eventually normalise. ÍSB Research will therefore continue using its customary method of measuring the CPI until there is reason to do otherwise.

Housing market still ticking

The housing component of the CPI rose by a total of 1.2% in February and March combined. We expect it to keep that pace this month, rising by 0.54% (CPI effect 0.17%) in April. Our forecasting model assumes that imputed rent, largely a reflection of house prices, will rise by 0.8% (0.13%) and that paid rent will rise by 0.4% (0.02%).

Apart from the housing component, pharmaceuticals and medical products will have the strongest upward impact, according to our forecast. We expect the latter component to rise by 3.9% (0.07%) MoM. Presumably, the drivers of the increase are the depreciation of the ISK and the surge in global demand for drugs and medical goods during the pandemic. We also expect food and beverages to rise in price by 0.47% (0.06%) as a result of the weaker ISK.

Other upward-pushing items are clothing and footwear (0.03% CPI effect) and recreation and culture (0.03% CPI effect).

Travel and transport push downwards

The travel and transport component is set to fall by 0.4% between months (-0.06% CPI effect). We expect petrol prices to fall, with the plunge in global crude oil prices somewhat counterbalancing the ISK depreciation. This can be expected to affect domestic petrol prices in coming months, on top of the 4.6% decline in February and March combined. We project a 2.6% drop in petrol prices in April (-0.09% CPI effect).

Airfares fell 10% in March. Analysing the air travel component has been unusually difficult in the current environment, as both supply and demand are virtually non-existent. The usual pattern is for airfares to rise over the Easter holidays, but in the midst of a pandemic, other principles prevail, and we therefore expect the component to remain flat MoM in April.

 Inflation to pick up starting at mid-year

The inflation outlook for the next few months is relatively favourable. We expect the CPI to rise by 0.2% in May and 0.3% in June and then fall by 0.2% in July. If our forecast materialises, inflation will remain below the target, measuring 1.9% in July.

We then expect it to pick up somewhat, reaching 2.6% at the beginning of 2021, owing to the depreciation of the ISK, on the one hand, versus a negligible rise in house prices and smaller wage cost increases, on the other. Inflation will start to taper off again around mid-2021.

Uncertainty is unusually pronounced at present, and the ISK is one of the main uncertainties in our forecast. The exchange rate has fallen by an average of 13% year-to-date against major currencies. Our forecast is based on the assumption that the exchange rate will hold relatively steady near the current level, but if it falls more than we anticipate, imported goods prices will rise more than we have projected here. On the other hand, later this year, house prices could end up containing inflation more than we expect.


Bergthora Baldursdottir




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