Fuel prices keep rising, while airfares have fallen

The transport component affected the index the most, increasing by 0.9% overall (0.15% CPI effect). The price of fuel rose 8.9% MoM (0.27% CPI effect) and, for the second month running, pushed the index upwards more strongly more than any other item. In September, the increase in fuel prices stemmed primarily from the value-added tax hike. This time, however, it is due mainly to higher global oil and petrol prices.

Pulling in the other direction was a 3.1% decline in airfares (-0.09% CPI effect), which took us by surprise, particularly because of the recent surge in jet fuel prices. Presumably, the drop in demand at the end of the peak tourist season weighed heavier this time. Motor vehicle prices fell also, by 0.9% (-0.04%), the fourth consecutive monthly decline. It is likely, though, they will rise in the months ahead, when electric vehicle subsidies are reduced and, for more expensive cars, cancelled entirely.

Food prices climb despite price freezes

Food and beverage prices rose by 0.4% (0.06%) during the month, which is noteworthy, given that several of Iceland’s largest grocery stores introduced either price freezes or price cuts for the remainder of this year. Closer scrutiny shows that the October uptick is due mostly to a rise in meat prices. However, the overall increase is well in line with the Icelandic Federation of Labour’s grocery price index, which rose by 0.45% MoM.

Outpatient service fees push the health component higher

The health component rose by 1.8% between months (0.07%), mainly because of hikes in fees for visits to physiotherapists, speech therapists, and occupational therapists. The fee hikes, which were expected, were due to the Government’s change in fees for outpatient healthcare services. The doubling of fees for healthcare centre visits took effect at the start of September, and fees for visits to the above-mentioned therapists kicked in this month. In addition, the price of medicines rose by 2.1% (0.02%).

Imputed rent develops as forecast

Imputed rent increased by 0.4% MoM (0.08%), exactly as we had projected. This is more than the 0.3% rise in September but far below the 0.9% jump in August. Imputed rent has therefore risen more modestly in the past two months.

The rental market has also cooled a bit, and the rent price index has fallen for two months in a row. We expect imputed rent to increase moderately in the months ahead, but whether this happens is quite uncertain, as imputed rent has proven far more stubborn than we had anticipated.

What is driving inflation?

Of this month’s headline inflation rate of 5.9%, the housing component accounts for 1.5 percentage points. The contribution from housing has been shrinking concurrent with slower rises in imputed rent and the cooling of the labour market and is now at its smallest since summer 2021. This can be seen in the fact that inflation excluding housing is now the same as headline inflation.

The second-strongest contributor is public services, which account for just under 1.4 percentage points. The per-kilometre charge for motor vehicle use is still a major factor, and now the impact of higher healthcare fees has emerged in full. Imported goods add 0.2 percentage points to twelve-month inflation, the second positive contribution in a row, whereas they had pulled inflation downwards over the first eight months of the year. The flip from a negative to a positive contribution is due mainly to the spike in fuel prices. Services, including housing, therefore explain about 80% of total inflation.

The inflation outlook further ahead

The inflation outlook for the months ahead is virtually unchanged since September. Our preliminary forecast is as follows:

• November: CPI to fall 0.4% (twelve-month inflation 6.0%) – Singles Day will fall during the price measurement week; airfares decline. Offsetting this, motor vehicle prices will rise due to changes in electric vehicle subsidies. Even though the CPI is set to fall, headline inflation will inch upwards, as the unusually favourable November 2025 measurement will drop out of the twelve-month comparison.
• December: CPI to rise 0.85% (twelve-month inflation 5.7%) – the effects of special discount days reverse for the most part, and the seasonal spike in airfares pushes inflation upwards.
• January: CPI to fall 0.1% (twelve-month inflation 5.2%) – Unit levies and public sector fee schedules rise, as does the per-kilometre charge. Seasonal sales and lower airfares pull in the opposite direction.

The outlook is for inflation to start easing after the turn of the year and move close to the upper threshold of the Central Bank’s inflation target in 2027. This forecast is subject to considerable uncertainty, however. At present, uncertainties centre not least on developments in oil prices, which have risen again in the recent term. If the increase proves to be a lasting one, it could affect inflation more strongly than is assumed here.