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Inflation rises to 8% in September

House prices and end-of-sale effects are the main drivers of the September jump in the CPI, pushing headline inflation upwards to 8%. The outlook is for inflation to remain around this level through the year-end and then start to fall quickly in early 2024.

According to newly published figures from Statistics Iceland (SI), the CPI rose 0.35% month-on-month in September, pushing headline inflation up from 7.7% to 8.0%. Twelve-month inflation excluding housing rose as well, from 7.6% to 7.7%.

The September measurement is in line with our forecast. Overall, analysts’ forecasts lay in the 0.15-0.4% range, including our own projection of a 0.4% MoM rise in the CPI. This month’s measurements contain nothing in particular that takes us by surprise. Imputed rent is a major factor in the increase, as are end-of-sale effects and higher fuel prices. These were offset to a degree by airfares, which fell during the month, as they generally do in September.

House price inflation pushes the CPI upwards

The main upward-pushing item in September is the housing component, which rose by 0.7% (0.21% CPI effect) overall, with paid rent rising 0.9% (0.03%) and imputed rent by another 0.9% (0.16%). Under the imputed rent subcomponent, the market price of housing rose 0.3% and the interest component 0.6%. Housing market prices have therefore risen less than the house price index, which was published earlier this month and showed an increase of 0.7% MoM.

Closer scrutiny of housing market prices shows that the price of multi-family homes in the capital area fell the most, or by 0.5%. Housing in regional Iceland rose in price by 0.2%, while single-family homes in greater Reykjavík fell by 0.3%.

The YoY increase in house prices gained pace slightly between months and now measures 2.3%. House prices in regional Iceland have risen the most in the past year, or by 5.4%. Next in line are capital area condominium prices, which have increased by 1.8% in the past year, whereas detached home prices in the capital area have fallen by 0.7% over the same period.

Most components contribute to the rise in the CPI

Apart from housing, the main driver of inflation in September is the clothing and footwear component, which increased by 3.7% (0.14%), owing to the end of seasonal sales. a combined Clothing and footwear prices have now risen by 9.6% in August and September, the typical end-of-sale period.

Food and beverages rose in price as well, by 0.5% (0.07%), although food price inflation has slowed markedly in recent months, driven by smaller price hikes abroad and, not least, by a stronger ISK. The recreation and culture component rose by 0.7% (0.07%), mainly because of an increase in fees charged for participation in sports and recreational activities.

Furthermore, other goods and services increased in price by 0.5% (0.03%), chiefly because of fees charged by pre-schools and private childcare providers, which commonly rise in the autumn.

The most prominent downward-pulling item for the month is the travel and transport component, which fell by 1.2% (-1.8% CPI effect), owing mostly to a 9.8% decline in airfares (-0.22%) and a 0.4% drop in motor vehicle prices (-0.02%). Pulling in the other direction, however, is a 2.3% increase in fuel prices (0.07% CPI effect). The hotel and restaurant services component declined as well, by 0.4% (-0.02%).

Near-term inflation outlook

We expect twelve-month inflation to fluctuate within a narrow range in coming months. According to our preliminary forecast, the CPI will rise 0.4% in October, 0.2% in November, and 0.6% in December, and headline inflation will measure 7.5% in December. We then expect it to fall faster after the turn of the year, when large monthly increases drop out of twelve-month measurements. According to our long-term forecast, inflation will average 5.4% in 2024 and 3.7% in 2025.

To be sure, the inflation outlook remains highly uncertain. The near-term situation depends heavily on the housing market and imported inflation. Further out the forecast horizon, other uncertainties will be come into play. Of particular importance are the next wage negotiations, which are rapidly approaching.


Bergthora Baldursdottir