Inflation set to slow marginally in June

ÍSB Research forecasts that twelve-month inflation will measure 5.9% in June. The pace will therefore change slightly during the month but, according to our forecast, will remain relatively inelastic over the summer. Nevertheless, we think it highly likely that inflation will fall rather quickly this autumn, and we project it to measure 5.3% at the year-end.

We expect the consumer price index (CPI) to rise by 0.6% month-on-month in June, lowering headline inflation from 6.2% to 5.9%, after a fairly unexpected uptick in May. In part, the May increase was due to imported goods prices, which rose after having eased in April. In the euro area, inflation rose in May, which could explain some of the increase seen in Iceland, although the impact was probably very limited. In addition, airfares did not fall as much as we had forecast. As a result, we expect the June increase in airfares to be relatively modest for this time of year. Statistics Iceland (SI) will publish the CPI for the month on 27 June.

Housing component the main driver of inflation

As in recent months, the housing component will be the main catalyst of inflation. The June measurement will be SI’s first using the new method for calculating imputed rent. The new method is based on rent price data instead of prices in real estate transactions plus the interest component. We forecast that imputed rent will rise by 1.1%, as there are a number of signs that the rental market is fairly tight. Because the imputed rent calculation method is brand-new, our forecast of the housing component is subject to greater uncertainty than usual. Despite the initial uncertainty accompanying the change, we think volatility in the housing component will diminish over time, as the new method is not affected by short-term fluctuations in the financial market.

Annual rise in airfares, while fuel prices fall

Apart from housing, the travel and transport component is set to be the main driver of inflation in June, rising by 0.64% (0.10% CPI effect). Airfares, a subcomponent of travel and transport, are expected to rise by 5.1% (0.09% CPI effect), reflecting the jump typically seen during the peak tourist season. The price of hotel and restaurant services will rise as well, by 1.1% (0.06%), also reflecting the peak season. Fuel prices, which are projected to decline by 0.6% (-0.02%), are the main downward-pushing item in our forecast, with both petrol and diesel fuel falling in price, according to our measurements. The drop in fuel prices is due in part to the recent decline in global oil prices.

We forecast that food and beverages will increase in price by 0.35% (0.05% CPI effect) and that the recent rise in imported goods prices will stretch into June to some extent. Other key items set to rise between months are furniture and housewares, by 0.4% (0.02% CPI effect), and recreation and culture, by 0.5% (0.05%).

The near-term outlook

Because the CPI did not rise substantially in summer 2023, YoY inflation will be relatively inelastic this summer. In our short-term forecast, we project that the CPI will rise by 0.2% in July, 0.4% in August, and 0.3% in September, and that headline inflation will measure 6.1% in July, 6.2% in August, and 6.1% in September.

There are numerous uncertainties, but in the months immediately ahead, inflation will depend not least on the impact of the new imputed rent calculation method, the summer tourist season, and the outcome of wage agreements for the remainder of the labour market. The effect of new wage agreements on the price level has yet to come fully to the fore, but the widespread price hikes seen in May could be an early sign that pay rises are starting to affect the price level. In order for our forecast to materialise, wage drift must be limited and the ISK exchange rate stable. The ongoing wars in various parts of the world are another uncertainty, and any escalation on that front will affect cross-border trade, prices, and economic developments in Iceland and abroad.


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Birkir Thor Björnsson




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