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Inflation set to fall further in July

We forecast that headline inflation will fall to 7.8% in July, its lowest since May 2022. We expect it to remain fairly steady thereafter, hovering around 8% over the next few months, and then start to fall again as the year comes to a close.

We project that the consumer price index (CPI) will rise by 0.2% MoM in July, lowering headline inflation from 8.9% to 7.8%. This would be Iceland’s lowest inflation rate since May 2022. According to our forecast, inflation will hover around 8% in the next few months and not fall to any marked degree until the year-end.

Inflation will plunge this month because last July’s steep rise in the CPI will drop out of twelve-month measurements. By the same token, the month-on-month rise in the CPI was relatively modest after July 2022, so headline inflation is unlikely to fall at any great speed in the next few months. Statistics Iceland (SI) will publish the CPI for the month on 21 July.

Strong seasonal sale effects

Summer sales appear stronger this year than in 2022. Clothing and footwear prices are set to fall by 7.7% (-0.30% CPI effect), according to our measurement. Furniture and housewares will fall as well, by 2.4% MoM (-0.15% CPI effect), continuing the trend that started in June. In the past three years, sales have been far shallower than we had grown accustomed to, owing to strong pandemic-era demand for the goods that typically go on sale – clothing, electronic equipment, and housewares.

Airfares set to rise – but more modestly than often before

The travel and transit component will rise by 1.4% (0.21%), according to our forecast, owing mainly to higher airfares. We were surprised to see airfares rise by only 2.7% in June, but our measurements for this month suggest that they will increase by nearly 14% (0.30%) MoM in July. This is a far smaller increase than is typical for July, but it is quite uncertain exactly how prices will move. The reasons for a smaller-than-usual price hike could include lower fuel prices and a possible decline in demand among Icelanders – as could be seen in Icelandic Tourist Board data showing a 16% year-on-year decline in Icelandic nationals’ overseas travel in June.

The main item pulling against airfares in the travel and transit component is fuel prices, which are set to fall by 1.3% MoM (-0.04% CPI effect). Motor vehicle prices, on the other hand, should hold virtually unchanged.

We expect food and beverages to rise in price by 0.55% (0.08%), roughly the same as in June. The main contributor is the increase in dairy product prices that took effect on 1 July, following the agricultural pricing committee’s decision to raise the price paid to farmers for milk. Food price inflation has lost pace in recent months, as can be seen clearly in July data, apart from the dairy price hike.

Will house price inflation lose steam?

According to our measurements, house prices will rise much more slowly in July. SI’s price measurements are based on three-month averages, and the housing market appears to have been buoyant in March. But March will drop out of this month’s measurement, and the market appears to have been far more tranquil in April, May, and June.

According to our measurements, imputed rent will rise by 0.9% (0.17% CPI effect) MoM, with the market price of housing up 0.25% and the interest component pushing upwards by another 0.65%. We expect house price inflation to keep easing in the next several months.

Headline inflation around 8% in coming months

Twelve-month inflation fell decisively in June, to 8.9%. If our forecast for July materialises, the headline inflation rate will drop below 8% for the first time in over a year. In the months to follow, we expect inflation to fluctuate somewhat, ranging between 7.8% and 8.4%. According to our preliminary forecast, the CPI will rise 0.4% in August. 0.5% in September, and 0.4% in October, leaving headline inflation at 8.1% in October. We project that inflation will average 8.9% in 2023 as a whole.

The outlook is highly uncertain. The near-term situation depends heavily on the housing market and imported inflation. We expect house prices to rise slowly, but if they outpace our projections, inflation will be that much more persistent. Imported inflation has subsided as well. In foreign markets, various goods prices have been stable or falling recently. These lower prices will spread to Iceland, of course, and as we have reported recently, the ISK has appreciated and looks set to keep doing so.

Further out the forecast horizon, other uncertainties will be added to the mix. Chief among them is the rapidly approaching round of wage negotiations, the results of which will strongly affect price stability. According to our long-term forecast, inflation will average 5.5% in 2024 and 3.8% in 2025.


Bergthora Baldursdottir




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