Housing component puts a spanner in the works

The housing component was the main driver of inflation this month, owing to a 0.9% jump in imputed rent (0.19% CPI effect). Although the increase was in line with the pattern seen in recent months it was larger than in September. Imputed rent has been difficult to predict ever since summer 2024, when SI adopted a new calculation method. As the chart below shows, the market price of residential property (older measurement) has eased slightly, while imputed rent (the new calculation of the rent price) has continued to rise.

The housing market is more tranquil than before, as we have discussed recently. Furthermore, the rent price index compiled by the Housing and Construction Authority (HMS) has hardly budged in two months. The measurements taken by HMS and SI are not the same, although they do have some similarities. Simply put, the rent price index is based on the average price per square metre of rental apartments in the greater Reykjavík area according to new residential leases. It is published with a one-month lag. Imputed rent is the estimated rent price of all owner-occupied housing and is based on all rental leases in effect during the month in question.

Most CPI items have risen

Most other CPI items rose between months. Recreation and culture increased by 0.8% (0.09%), second only to the housing component in terms of the CPI effect. Food and beverages rose in price by 0.55% (0.09%), owing mainly to an increase in the price of meat. Food price inflation started to ease a few months ago, after a steady upward trend earlier in the year, so the resumption of price hikes gives cause for concern.

Airfares rose 1.1% (0.03%). The collapse of airline Play did not make a strong impact on airfares in October as measured by SI. Only a part of that measurement took place after the airline failed, as airfares as measured for CPI purposes are based on prices in August, September, and October. The full effect of Play’s demise will therefore emerge more clearly in the next few months, although we do not expect it to be substantial.

Clothing and footwear rose in price by 1.1% MoM (0.04% CPI effect), and furniture and housewares prices were up 1% (0.05%), showing the last vestiges of the end-of-sale effects that we had projected in our forecast.

The only item to fall between months was hotel and restaurant services, which declined in price by 1.3% (-0.07%) due to seasonal effects.

Uptick in underlying inflation

All core indices rose between months, by 0.1-0.3%, indicating that underlying inflation (i.e., inflation excluding volatile items) is on the rise. This will certainly be thorn in the side of the Central Bank (CBI) Monetary Policy Committee (MPC), which pays close attention to these core indices in its assessment of underlying inflationary pressures.

Headline inflation broadly unchanged in coming months

As is noted above, inflation has pushed higher than we had expected; therefore, it will be higher in coming months than we had previously assumed.

Our preliminary forecast for the months ahead is as follows:

• November: CPI to rise 0.1% (twelve-month inflation 4.3%) – Airfares fall, offsetting rises in other key items.
• December: CPI to rise 0.4% (twelve-month inflation 4.3%) – Airfares spike during the holidays. Other items increase marginally. Headline inflation holds steady MoM.
• January: CPI to fall 0.2% (twelve-month inflation 4.4%) – Price list hikes and unit-based increases offset seasonal sales and falling airfares.

Headline inflation is likely to hover around the current level in the next few months and then start easing incrementally in H1/2026. The chief uncertainty in our short-term forecast is imputed rent, which has now risen two months running and has been quite difficult to predict.

Since this morning’s measurement was published, market yields on nominal Treasury bonds have risen, thereby pushing the breakeven inflation rate upwards. In essence, this means that the market expects inflation to remain persistent and the MPC to keep interest rates high. The MPC will publish its next policy rate decision on 19 November, and today’s inflation numbers will be the most recent ones they will have in hand. We think the most likely outcome of that decision is that the policy rate will be held unchanged despite stiffening headwinds in the export sector, as this morning’s figures show that inflation is proving intransigent indeed.