Key CPI components to rise

Travel and transport are expected to contribute most to the December increase in the CPI, owing mainly to the seasonal jump in airfares, which our measurements suggest will be around 11.7% MoM, pushing the CPI upwards by 0.27%. In November, airfares plunged unexpectedly by 14% MoM, far more than was generally assumed. The drop may stem from a downturn in demand for travel to Iceland, as suggested by new figures from the Icelandic Tourist Board. It will be interesting to keep track of developments in coming months, as weaker demand could translate to lower airfares.

Offsetting the rise in airfares is the decline in fuel prices. We expect fuels to fall in price by 1.9%, lowering the CPI by 0.07%. The price of Brent crude has been trending downwards in the recent term, and it appears that the global decline is passing through to pump prices in Iceland.

The housing component will feature strongly during the month, as it accounts for nearly 30% of the CPI. Weighing heaviest within the housing component is imputed rent, which we expect to rise by 0.4% MoM, increasing the index by 0.08%. This is similar to the increase in November, but smaller than in October. Imputed rent has proven difficult to predict, but we expect it to rise at more or less this pace in the months ahead.

Discount days over, price cuts reverse

Last month’s CPI measurement changed radically. Key components declined between months, owing to the so-called discount days that have made landfall in Iceland in recent years. SI’s price measurement week happened to include Singles’ Day which strongly affected the index. Not only did the strength of the impact take forecasters unawares, it was unprecedented, which makes it harder to project when the discounts will reverse.

We assume that key items will recover most, but not all, of the price cuts in November. According to our forecast, clothing and footwear prices will increase by 2.5% and push the CPI upwards by 0.09, after declining by 2.7% in November. Furniture and housewares prices are set to rise by 1.9%, also increasing the index by 0.09%, after a drop of 2.2% in November.

Near-term inflation forecast

Inflation now measures 3.7%, its lowest in five years. Last month’s inflation measurement improved the outlook slightly, but clearly, the main items that fell in price will bounce back in December. According to our forecast, headline inflation will measure 3.9%, just shy of the CBI’s 4% deviation threshold. Inflation has clung tenaciously to that 4% threshold for this entire year. According to our preliminary forecast, it will remain broadly at that level over the months to come:

• January: CPI to fall 0.1% (twelve-month inflation 4.1%) – Price list hikes and unit-based rises in public levies offset winter sales and falling airfares. Possible changes to excise taxes and the adoption of a per-kilometre charge for motor vehicle use could have some impact if the relevant bills of legislation are passed before the year-end.
• February: CPI to rise 0.7% (twelve-month inflation 3.9%) – End of seasonal sales for most key items.
• March: CPI to rise 0.3% (twelve-month inflation 3.8%) – Airfares rise, but most other items hold broadly steady.

If the forecast materialises, inflation will measure 3.8% in March and remain in that ballpark during the months thereafter. We expect it to start falling more rapidly as the spring advances, to an average of roughly 3% in H2/2026.

The key uncertainty in our preliminary forecast is imputed rent, which has eluded forecasters in the recent past. The month of January is also quite uncertain, as excise tax changes and the adoption of the per-kilometre charge, if enshrined in law before the year-end, could affect the index.

According to our long-term forecast, inflation will average 3.4% in 2026 and 3.3% in 2027. It will therefore subside from its current level in the coming term, but based on our assumptions concerning wages and rent prices, it will not realign with the target during the forecast horizon.

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