Inflation keeps falling

We project that the consumer price index (CPI) will fall 0.5% month-on-month in January, lowering headline inflation from 2.0% to 1.9%, well below the Central Bank’s (CBI) 2.5% target. If our forecast materialises, this will be the lowest measured inflation rate in more than two years.


Summary

  • Our forecast: CPI to decline 0.5% in January

  • Inflation to fall from 2.0% to 1.9%

  • Seasonal sales, airfares, and house prices push downwards

  • Increase in price lists and public levies

  • Inflation below target throughout the year

The near-term inflation outlook is positive, owing to a stable króna, expectations of modest wage rises, and a well-balanced housing market. We project that inflation will be below the CBI’s target through end-2020 and then inch slightly above target in 2021. Statistics Iceland (SI) will publish the CPI for January at 9:00 hrs. on 30 January.

Seasonal sales make their mark on measurements

January will feature the usual tug-of-war between price list hikes and increased public levies, on the one hand, and post-holiday sales, on the other. According to our forecast, the effect of seasonal sales will weigh heavier this month, with clothing and footwear prices falling by 10% (-0.45% CPI effect), and furniture and housewares falling 5.5% (-0.30%).

In general, air transport is the strongest downward-pushing component in January; for example, it has fallen by an average of 8.5% in the past three years. This time, however, we expect a modest decline of about 5.6% (-0.10%), after a modest increase in December.

We expect the housing component to remain relatively calm, rising by 0.32% (0.10%) in January, after falling in December. We expect imputed rent, which mainly reflects house prices, to fall by 0.20% (-0.03%). In our opinion, this is due mainly to falling mortgage lending rates, which have affected imputed rent measurements rather decisively in the recent term. We also forecast that paid rent will rise by 0.20% (0.01%) and that residential utilities prices will rise by 2.0% (0.18%).

Other upward-pushing items in our forecast include food and beverages (0.05% CPI effect), alcoholic beverages and tobacco (0.04%), and hotel and restaurant services (0.05%).

 Inflation below target in 2020

The near-term inflation outlook is quite good, and we expect inflation to stay below the target for the remainder of this year. We forecast that the CPI will rise by 0.5% in February, 0.5% in March, and 0.2% in April. According to these projections, inflation will measure 2.0% in April 2019.

As is mentioned above, we expect inflation to remain below target this year and then ease just above it next year, averaging 2.2% in 2020 and 2.6% in 2021. The main assumptions underlying our forecast are a relatively stable exchange rate, moderate wage hikes, and a well-balanced housing market featuring price increases in line with the general price level.

Author


Bergthora Baldursdottir


Analyst

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