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Inflation set to break the 10% barrier in August

The outlook is for a slight month-on-month uptick in inflation in August, with end-of-sale effects and house prices the main upward-pushing items and petrol prices and airfares pulling downwards. We expect inflation to peak in August and September.

We project that the consumer price index (CPI) will rise by 0.5% month-on-month in August, and that twelve-month inflation will inch up to 10% from 9.9% in July. Inflation has not been this high in nearly 13 years – more precisely, since September 2009. End-of-sale effects and house prices will be the main drivers of the increase, whereas lower airfares and petrol prices will be the main offsetting items. Statistics Iceland (SI) will publish the CPI for the month on 30 August.

Rising house prices and the end of seasonal sales

Rising house prices have persistently pushed the CPI upwards in the recent term. Imputed rent is up nearly 15% year-to-date, and the twelve-month rise in house prices now measures around 25% nationwide. We expect house price inflation to start slowing markedly soon, and imputed rent with it. We forecast that imputed rent will rise by 1.9% MoM in August (0.36% CPI effect), but here it is important to remember that it is calculated based on a three-month moving average, so the August measurement will therefore capture price movements in May, June, and July. We then expect the rise in imputed rent to lose significant momentum in coming months.

Summer sales come to an end each year in August and September, and our measurements indicate that this year will be no different. Clothing and footwear look set to rise in price by 4.0% MoM (0.14% CPI effect), and furniture and housewares prices by 0.9% (0.06%). On a more positive note, our measurements indicate that food and beverage prices will increase by only 0.13% between months (0.02%), about the same as in July – and the smallest rise since July 2021. This accords well with the situation abroad, where the price of various inputs for global food production has fallen significantly after surging earlier in the year.

Travel and transport pull downwards

The main item offsetting these increases in August is the travel and transport component. Both petrol prices and airfares have soared in recent months, but this episode is very probably coming to a close. Airfares follow a seasonal pattern, of course, and generally decline in August, and petrol prices seem to be on the decline, owing to the steep drop in the price of fossil fuels in foreign markets.

The component as a whole will decline by 1.6% (-0.25% CPI effect), with airfares falling by 9.3% (-0.20%) and fuel prices by 2.5% (-0.09%). This time, though, we consider the risk profile to be tilted to the downside, as airfares and/or petrol prices could fall more than we have forecast here.

High inflation but a brighter outlook

The outlook is for headline inflation to remain quite high in the near term, but better times lie ahead, and we expect it to peak in August and September. According to our preliminary forecast, the CPI will rise 0.5% in September, 0.4% in October and 0.3% in November. If this forecast materialises, inflation will top out in the next two months and then start a gradual decline, to 9.7% in November.

It goes without saying that there is a long road ahead before inflation returns to the Central Bank’s (CBI) 2.5% target. Hopefully, though, the economy is recovering from the impact of the pandemic and the war, which should lead to greater price stability, all else being equal. We expect inflation to lose steam as import prices stabilise, the ISK appreciates, and the housing market rebalances. According to our long-term forecast, inflation will average 8.4% in 2022, 6.5% in 2023, and 4.0% in 2024. Given the prospect of a cooler housing market and lower imported inflation, one of the key uncertainties in our long-term forecast centres on the wage agreements that expire towards the end of the year.


Bergthora Baldursdottir




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