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Inflation peaks just in time for Christmas

Inflation has climbed to 5.1% – Iceland’s highest measurement since mid-2012 – after the CPI rose 0.45% in December. Developments in Iceland are consistent with those elsewhere in the OECD, and the outlook is for inflation to taper off again next year, both at home and abroad.

According to Statistics Iceland’s (SI) newest figures, the CPI rose 0.45% month-on-month in December, raising headline inflation from 4.8% in November to the current 5.1%. This is Iceland’s highest inflation rate since mid-2012. The CPI excluding housing rose by 0.37% during the month, and twelve-month inflation thus measured was 3.3%. The numbers show both that there continues to be a significant difference between inflation with and without the housing component, and that inflationary pressures are rather widespread at present.

The December CPI measurement is in line with the average of published forecasts. We had projected a rise of 0.4%, whereas forecasts lay in the 0.3-0.6% range. Most of the main CPI components developed broadly in line with our expectations. Airfares did rise more than we had anticipated, while furniture and housewares prices fell unexpectedly.

Is house price inflation losing steam?

In keeping with the recent pattern, the housing component played a prominent role in this month’s CPI increase. The component as a whole rose by 0.6% (0.19% CPI effect), including an increase of about 0.6% (0.10% CPI effect) in imputed rent. The home maintenance subcomponent also rose by 1.4% (0.08% CPI effect), owing mainly to higher materials costs.

Imputed rent is based largely on SI’s calculation of housing market prices based on registered purchase agreements. According to SI data, house prices rose by 0.7% MoM by this measure, which includes purchase contracts for the period from September through November. Although the increase is sizeable by most measures, it is the smallest recorded since February 2021, perhaps indicating that the Icelandic housing market is starting to cool off a bit.

In the past year, house prices nationwide have risen by nearly 16%, according to SI figures, with single-family homes in greater Reykjavík up 18%, housing in regional Iceland up 16.5%, and capital area condominium prices up nearly 15% since the beginning of 2021.

Dairy product prices and airfares rise, petrol and housewares prices fall

Chief among the other CPI items that pushed the index upwards in December were the following:

  • Food and beverage prices rose by 0.7% (0.11% CPI effect). This is due largely to a 3.3% increase in dairy products (0.09% CPI effect), as the agricultural pricing committee recently announced a commensurate rise in wholesale prices, which appears to have been passed through directly to retail prices.
  • Air transport prices rose by 10.3% (0.15% CPI effect). International airfares usually rise before the holidays, and this year was no exception. It has been difficult to detect a pattern in airfares recently, as the airline industry was in a pandemic-induced state of disarray from early 2020 until this summer, and again this autumn.
  • The item Other goods and services rose by 0.8% (0.06%), owing mainly to hikes in the price of cosmetics and insurance and financial services.

On the other hand, items pulling the CPI downwards included the following:

  • Furniture and housewares fell in price by 1.3% (-0.09%).
  • Petrol prices fell 1.0% (-0.03% CPI effect). This is in line with the steep drop in global prices following the late October peak.

Inflation is widespread

As the chart indicates, the housing component is a major player in inflation numbers at present. Of December’s 5.1% headline rate, which is also the rise in prices over the year 2021, just under 2.3% is due to housing, while 1.2% stems from domestic services, just under 0.7% from domestic goods, and just under 1% from imported goods. But it cannot be said that the housing component alone explains the deviation of inflation from target, as inflation excluding housing measures 3.3%, as is mentioned above. Factors such as domestic costs – wage costs in particular – rising imported input prices, and surging international shipping costs play an important role as well.

Furthermore, high inflation is far from a uniquely Icelandic malady these days. In the OECD as a whole, inflation averaged 5.2% in October, and based on the data coming from key OECD countries since then, it is probably even higher as the year-end approaches. The above-listed drivers of inflation in Iceland also push inflation upwards in other OECD countries, although the treatment of house prices and rent prices differs widely from one country to another. Another widespread driver of inflation is rising household energy prices. Iceland is an exception in that category, though, as the rise in domestic electricity and home heating prices has been modest in the recent past.

We expect inflation to subside after the turn of the year

We think inflation has probably peaked by now and that a disinflation phase lies ahead. According to our preliminary forecast, the CPI will decline 0.2% in January and then rise in February and March, by 0.6% and 0.4%, respectively. If this forecast is borne out, twelve-month inflation will measure 4.7% in March. Thereafter, we expect further disinflation as the ISK appreciates, the housing market rebalances, and the global market for production and shipping of consumer goods normalises once again. If our forecast materialises, inflation could realign with the Central Bank’s (CBI) 2.5% inflation target in Q1/2023.


Jón Bjarki Bentsson

Chief economist