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.
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.
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.
This report is compiled by Islandsbanki Research of Islandsbanki hf.
The information in this report originates in domestic and international information and news networks that are deemed reliable, along with public information, and Islandsbanki Research’s own processing and estimates at each time. The information has not been independently verified by Islandsbanki which therefore does not guarantee that the information is comprehensive and accurate. The views of the authors can change without notice and Islandsbanki holds no obligation to update, modify or amend this publication if assumptions change.
This publication is only published for informational purposes and shall therefore not be viewed as recommendation/advice to make or not make a particular investment or an offer to buy, sell or subscribe to specific financial instruments. Islandsbanki and its employees are not responsible for transactions that may be carried out based on information put forth in the report. Before making an investment decision, recipients are urged to seek expert advice and get well acquainted with the investments market and different investment alternatives. There are always financial risks related to investment activities, including risk due to international investments and fluctuations in the exchange rate of currencies. Investors’ investment objectives and financial position vary. Past performance does not indicate nor guarantee future performance of an investment.
The research report and other information received from Islandsbanki are meant for private use only. The materials may not be copied, quote or distributed, in part or in whole, without written permission from Islandsbanki.
This report is a short compilation and should not be considered to contain all available information on the subject it discusses.
Supervisory body: The Financial Supervisory Authority of Iceland (www.fme.is).
This report or copies of it must not be distributed in the United States or to recipients who are citizens of the United States against restrictions stated in the United States legislation. Distributing the report in the United States might be seen as a breach of these laws.
The information provided in this publication is not intended to be distributed or circulated in any manner in Canada and therefore should not be construed as any kind of financial recommendation or advice provided within the meaning of Canadian securities laws.
Laws and regulations of other countries may also restrict the distribution of this report.
Further information regarding material from Islandsbanki Research can be accessed on the following website: http://www.islandsbanki.is.