Fuel prices the main driver of the CPI increase 

Fuel prices are the main upward-pushing item in the October forecast. We project that they will rise MoM by 7.8% (0.24% CPI effect), outpacing our preliminary forecast. Global crude oil and gasoline prices have risen sharply in recent months and have already begun to affect prices at Icelandic petrol pumps. Fuel prices rose markedly in September, and more than can be attributed solely to the increase in value-added tax. It is uncertain how global prices will develop. If they keep rising or remain high, the impact could begin to show in a larger number of CPI subcomponents.

Airfares are expected to rise MoM as well – by 1.4% (0.04% CPI effect), according to our measurements. It would take very little to push airfares even higher in coming months, owing to the increase in jet fuel prices. On the other hand, demand for air travel weakens as time passes from the peak tourist season. 

Outpatient service fees push the health component higher 

The health component of the CPI rose somewhat in September, owing to the increase in fees for healthcare centre visits. We expect this to continue in October, as price hikes for visits to physiotherapists, speech therapists, and occupational therapists took effect at the beginning of the month, and SI’s measurements give reason to assume that they will affect the CPI in October. We expect the health component to rise by 1.1% (0.04%) between months. 

Will food prices fall? 

Several of Iceland’s largest grocery stores have recently announced price freezes or discounts for the remainder of the year. Just how this affects the CPI will depend in part on whether the goods in question are included in SI’s price survey, and how much weight those goods carry in the consumption basket. We think these price-related measures should curb the rise in the food and beverages component of the CPI, thereby easing price pressures in coming months. The Icelandic Federation of Labour’s grocery price index indicates that the grocery basket will rise in price by 0.52% MoM, however, not least because of a jump in prices at Nettó stores after last month’s drop. Excluding these swings, however, month-to-month price changes are generally small, and we expect the food and beverage component of the CPI to hold virtually unchanged between September and October.

Imputed rent broadly where we left it 

We mustn’t forget imputed rent, of course, as it weighs heavily in the CPI. We project an increase of 0.4% MoM, about the same as in September, but here, too, little would be needed to push it higher and cause inflation to exceed our forecast. 

The inflation outlook 

After the October measurement, twelve-month inflation will be marginally higher in coming months than we had previously forecast. It will fall faster in January, though, as unit levies and public sector fee schedules are set to rise less than we had previously estimated, due to the Government’s involvement in the recent wage agreement review. 

• November: CPI to fall 0.4% (twelve-month inflation 6.0%) – Singles Day will fall during the price measurement week; airfares decline. On the other hand, fuel prices will rise, albeit less than in October.
• December: CPI to rise 0.85% (twelve-month inflation 5.7%) – The effects of special discount days reverse for the most part, and the airfares will spike for the holiday season. Fuel prices will hold steady between months. 
• January: CPI to fall 0.1% (twelve-month inflation 5.2%) – Hikes in unit levies and public sector fee schedules. The per-kilometre fee for motor vehicle use is set to rise. Seasonal sales and lower airfares pull in the opposite direction. 

Further ahead, the outlook is for inflation to keep falling, moving close to 4%, the upper tolerance limit of the Central Bank’s inflation target, in 2027. This forecast is subject to considerable uncertainty, however. At present, that uncertainty centres not least on oil prices, and whether they keep rising or remain high for a protracted period of time. 

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