New per-kilometre charge has little impact – unlike the rise in car prices

The big news in SI’s figures is that the per-kilometre charge on vehicle use did not strongly affect the CPI. Petrol prices dropped 26% because of the cancellation of excise taxes, pushing the CPI downwards by 0.94%, whereas road taxes ballooned by 633%, pushing it up by 0.99%. The two items together contributed to a 0.05% increase in the CPI.

Changes in excise taxes on cars had an entirely different impact, though: vehicle prices jumped far higher than we had assumed, which is the main reason the CPI rose more than we had forecast. Motor vehicle prices overall increased 13.3% MoM, adding 0.56% to the CPI. A number of vehicle-related levies changed at the turn of the year. For instance, excise taxes on electric cars were cancelled, although electric car subsidies were reduced at the same time. Excise taxes on other cars were hiked sharply. According to SI’s press release, vehicle prices rose as follows: electric cars, 6.4%; plug-in hybrids, 16.3%; and petrol- and diesel-powered vehicles, 19.8%.

Seasonal sales weigh in, as usual

As is typical for January, winter sales affected the CPI categories that tend to go on sale at this time of year. Clothing and footwear prices fell by 7.4%, lowering the CPI by 0.27%, and the price of furniture and housewares dropped 5.4%, pushing the index down by another 0.23%. This is in line with our projections, and our preliminary forecast for the months ahead is therefore unchanged as regards end-of-sale effects.

Airfares fell 11% (-0.28% CPI effect) after jumping 26% in December, reflecting seasonal price swings. We had forecast a larger decline than this, however.

Food and alcoholic beverages rise in price

Food and beverage prices rose 1% MoM, increasing the CPI by 0.15%. Alcoholic beverages and tobacco prices were up 2.7% (0.07% CPI effect), owing to unit increases in public levies at the turn of the year, yet the price hike proved smaller than the unit increase itself, which was 3.7%.

No real surprises from the housing category

CPI inflation excluding housing rose MoM as well, to 4.5%, indicating that factors other than housing are fuelling inflation at present. The housing category as a whole increased by 0.37% (0.11% CPI effect), driven largely by imputed rent, which rose 0.4% (0.09%) amidst a newly tranquil housing market. In a noteworthy twist, housing-related public levies and utilities costs rose only modestly between months. The price of indoor heating surged unexpectedly in December, when utilities provider Veitur raised its rates, and waste collection fees are likely to increase in February.

The inflation outlook further ahead

Headline inflation is now above 5%, revisiting territory it has not seen since autumn 2024. To look on the bright side, this month’s spike is due primarily to changes in public levies, not to stronger underlying inflationary pressures. On the other hand, it is cause for real concern that inflation is rising and has now blown past the 4.7% specified in wage agreements as a trigger for contract review in August. Our preliminary forecast is as follows:

• February: CPI to rise 0.7% (twelve-month inflation 4.9%) – End of seasonal sales for most key items.
• March: CPI to rise 0.6% (twelve-month inflation 5.2%) – Seasonal sales reverse in full, airfares rise during the run-up to Easter.
• April: CPI to rise 0.3% (twelve-month inflation 4.5%) – Slight increases in most items, more modest rise in airfares due to the timing of Easter.

If this preliminary forecast materialises, headline inflation will measure 4.5% in April. While this is lower than the current rate, it is still above the 4% deviation threshold of the CBI’s inflation target and far above the 2.5% target itself. The CBI’s next policy rate decision will be announced next Wednesday, and ÍSB Research’s policy rate forecast is set for publication tomorrow. In the long run, however, the outlook is for inflation to fall further but remain close to the 4% upper tolerance limit for the rest of this year.