Inflation refuses to budge for COVID-19

According to newly published figures from Statistics Iceland (SI), the CPI rose 0.48% month-on-month in April, raising headline inflation to 2.2%, up from 2.1% in March. Inflation therefore remains below the Central Bank’s 2.5% inflation target. Twelve-month inflation excluding housing measured 1.9% during the month.

The April CPI measurement is slightly above our forecast and other published projections. We had forecast that the CPI would rise 0.3% between months. Chief among the items that rose more strongly than we had anticipated were motor vehicle prices, food and beverages, and furniture.

Measuring the CPI during a pandemic

In its press release, SI says that while the calculation of the April CPI went smoothly, the extraordinary circumstances currently prevailing did have some impact. Many wonder how SI can measure the CPI when some of the goods and services included in it are simply unavailable because of the ban on gatherings. According to the press release, SI used March measurements for those items that could not be measured due to lack of availability, including hair salon services, dental care, and physiotherapy. This method is internationally recognised for use when price measurements are temporarily unavailable. SI estimates that March numbers were used for some 10% of its April CPI measurements.

Further information and a list of frequently asked questions about the CPI can be found here.

ISK depreciation affects CPI measurements

The exchange rate of the ISK has fallen by an average of nearly 16% year-to-date against major currencies. Exchange rate pass-through to imported goods prices can be seen in April figures, specifically to include food and beverages, which rose in price by 1.5% month-on-month (0.20% CPI effect). Within the food and beverages component, the price of vegetables and potatoes rose most, by 9% (0.11% CPI effect), presumably due to strong demand in the recent past. Motor vehicle prices rose by 2.3% (0.12%), and the price of furniture and housewares rose as well (0.09% CPI effect).

According to the measurement, airfares rose MoM as well, by 2.1% (0.04%) – somewhat to our surprise, given that flight offerings were virtually non-existent during the month. In this case, though, it should be noted that the April measurement is based on part on data collected in February and March.

The main item offsetting the depreciation-driven rise in imported goods prices is the decline in petrol prices. Petrol fell in price by 4.6% MoM (-0.15% CPI effect) and is down more than 9% in the past three months. Clothing and footwear prices fell by 0.5% (-0.02% CPI effect).

Real house prices still on the rise

Developments in house prices in the CPI suggest a lively domestic housing market in the first quarter of 2020. SI’s April measurement of this item, which is based on purchase agreements concluded in January-March, indicated an increase of 0.8% MoM. Condominium prices in greater Reykjavík rose between months, as did house prices in regional Iceland, while single-family home prices in the capital area fell.

Over the past twelve months, market prices according to the index rose 6.3%, the equivalent of a real rise of just over 4%. Developments in house prices vary widely, however, depending on property type and location. In regional Iceland, for example, prices have risen by an average of 10.4% over the twelve-month period, while capital area condominiums have risen 6.0% and detached housing in the capital by only 2.8%. It is noteworthy that the first two of these price categories should have gained steam in recent months, given that the overall rise in real house prices was quite sluggish last autumn.

It should be remembered, though, that much of the impact of the COVID-19 pandemic has yet to show in the data. As a result, it will be interesting to monitor developments in the months to come.

Outlook for target-level inflation

The inflation outlook is relatively positive for the next few months. We project a 0.2% rise in the CPI in May, a 0.3% rise in June, and a 0.2% decline in July. If our forecast materialises, inflation will remain below the target, measuring 2.1% in July.

We do not expect an inflation spurt in the near future, despite the recent weakening of the ISK. Various other factors offset the currency depreciation, including falling oil prices and the slowdown in house price inflation. According to our forecast, inflation will be close to target at year-end 2020 and then average 2.5% and 2.4%, respectively, in 2021 and 2022.

Naturally, the inflation outlook is highly uncertain these days, and the ISK is the biggest question mark. Our forecast is based on the assumption that the ISK will remain broadly stable at close to the current level. That said, later this year, house prices could end up curbing inflation more than we expect.


Bergthora Baldursdottir



Jon Bjarki Bentsson

Chief economist