Inflation set to ease marginally in March

Twelve-month inflation will decline in March, albeit slowly. According to our forecast, it will fall more swiftly in coming months, possibly hitting 5.3% by mid-year. The recent labour market agreements are consistent with price stability and eliminate significant uncertainty about wage developments. Headline inflation will be very close to the Central Bank’s target by the end of the forecast horizon.

We project that the consumer price index (CPI) will rise by 0.5% month-on-month in March and that headline inflation will ease from 6.6% to 6.5%. The index rose modestly in March 2023 as compared with the months before and after, which is why twelve-month inflation is not expected to fall more this time.

The main factor pushing the CPI upwards this month is the interest component of imputed rent. Another inflationary factor is the seasonal rise in airfares due to the forthcoming Easter holidays. Statistics Iceland (SI) will publish the CPI on 26 March.

Housing market and methodology changes

The housing component will weigh heaviest in the March rise in the CPI. The component as a whole will increase 0.6% (0.19% CPI effect), owing mainly to imputed rent, which we expect to rise by 0.8% MoM (0.15% CPI effect). Of that increase, 0.5% is due to the interest component and the other 0.3% to house prices.

We project that house prices will rise in coming months, largely because of the Government buy-up of homes in the town of Grindavík. Prices in regional Iceland – on the Suðurnes peninsula in particular – will most likely increase faster than prices in greater Reykjavík. That said, house price inflation will pale in comparison with the surge in 2020-2022 and will very probably be modest.

SI is planning to introduce a new imputed rent calculation method in the near future. The measurement will be based on rent prices instead of house prices, as is commonly done in neighbouring countries. According to SI, the new method will be adopted this spring, and a report on the change will be published this month. In the long run, the change in methodology will probably have a positive impact on the measurement and will reduce volatility in the housing component.

Airfares set to rise for Easter

Apart from the housing component, the seasonal increase in airfares will weigh heaviest in the March rise in the CPI. Our measurement indicates that airfares will rise by 7.7% (0.13% CPI effect), reflecting the typical holiday surge. Airfares generally spike in April, but because Easter comes early this year, we expect the seasonal price hike to be spread over both March and April.

Other CPI components look set to be broadly stable during the month. End-of-sale effects appear to have come more or less fully to the fore in February. According to our forecast, other key items set to rise in price MoM are food and beverages, up 0.3% (0.05% CPI effect); hotel and restaurant services, up 0.5% (0.03%); and clothing and footwear, up 0.8%(0.03%).

Inflation outlook broadly unchanged

Headline inflation currently measured 6.6%. Figures for both January and February took analysts somewhat by surprise. The CPI fell in January, in defiance of forecasts, and in February it rose considerably more than projected. Despite the minor decline in twelve-month inflation in February, and now in March, the outlook is far from bleak, as inflation looks set to fall rapidly in coming months.

The main uncertainty for the next few months, for instance, is whether the rise in airfares will be concentrated in March or in April. But no matter when it occurs –in March, in April, or in both months – the long-term impact will be the same. Another uncertainty is house prices; i.e., how much they rise in the near future and what effect SI’s new imputed rent calculations have on the measurements.

Our preliminary forecast is as follows:

  • April – CPI to rise 0.6% (twelve-month inflation 5.8%): Airfares are set to keep rising, following the seasonal pattern. If they do not rise in March, the CPI increase in April will be correspondingly larger, and vice versa.
  • May – CPI to rise 0.3% (twelve-month inflation 5.7%): Airfares are set to ease after the March-April jump. House prices will be the main driver of the increase in the index.
  • June – CPI to rise 0.5% (twelve-month inflation 5.3%): The summer tourist season will start to kick in. Airfares will push the index upwards, and hotels and restaurants raise their prices. House prices will also push upwards.

If our preliminary forecast materialises, headline inflation will therefore fall rather quickly, to 5.3% in June. According to our long-term forecast, inflation will average 5.6% in 2024, 3.4% in 2025, and 2.9% in 2026.

There are plenty of uncertainties, of course, but as we see it, the main ones are the ISK exchange rate and real estate prices. Favourable wage agreements affecting a large share of the private sector were signed last week. and we hope they will set the tone for the rest of the labour market. In our opinion, the wage developments provided for in the contracts are quite conducive to price stability, and the fact that the contracts have a term of four years is highly gratifying.


Bergthora Baldursdottir


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Birkir Thor Bjornsson




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