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Inflation stands firm at 4.3%

Once again, house prices account for a large share of the rise in the CPI, leaving headline inflation flat month-on-month at 4.3%. Inflation has therefore remained stubbornly unchanged for the three months since May. We expect it to hold close to the upper tolerance limit of the Central Bank’s (CBI) inflation target for a while to come and then start to ease after the turn of the year, aligning with the target in Q3/2022.

According to figures released recently by Statistics Iceland (SI), the CPI rose 0.46% MoM in August. Headline inflation therefore stands still between months, measuring 4.3%, as it has since May. Twelve-month inflation excluding housing measured 3.3% during the month.

The August measurement is above our forecast and those of other official forecasters. We had projected a rise in the CPI of 0.4% MoM. The main difference between our forecast and SI’s measurement lies in the housing component, as well as furniture and housewares, which rose more sharply in price than we had assumed.

House prices still riding high

Imputed rent accounted for a hefty share of the month’s rise in the CPI, as it has in recent quarters. As before, house prices are surging unabated, with the nationwide increase as measured by SI totalling 1.0% MoM. The rise was greatest in regional Iceland, at 2.4%, although the price of detached housing in the capital area rose significantly as well (2.2%). Capital area condominium prices rose by only 0.1% MoM, however.

The twelve-month rise in house prices nationwide now measures just over 13%, where it has more or less hovered since May. As in the recent past, twelve-month house price inflation was highest for detached homes in greater Reykjavík (16%) and lowest in regional Iceland (11%), although the spread between the two narrowed in August, as the chart indicates.

The steep rise in house prices was a factor in the CBI’s policy rate increase last week. CBI officials pointed out that last year’s policy rate cuts had made a strong impact on asset prices and that house price inflation had been the main roadblock to disinflation this summer. The housing market was not showing signs of a bubble, they said, but rather an imbalance between weak supply and burgeoning demand, and the rate hike was to some extent intended to cool down the property market. In view of this, it will be interesting to keep abreast of market developments in coming months.

Other items also rose between months

Apart from the housing component, the furniture and housewares component was the strongest upward-pushing CPI item in August. The component as a whole rose by 1.1% (0.07% CPI effect), owing to sales effects that are now reversing, as furniture and housewares prices had fallen by 1.6% over the fast three months.

The travel and transport component rose by 0.2% (0.03% CPI effect), with motor vehicle prices rising by 0.6% (0.03%) and fuel prices by 1.0%  (0.03%). Fuel prices have increased by 5% over the past three months, in the wake of surging prices in global markets. On the other hand, airfares fell by 1.7% (-0.03%). Developments in airfares are quite uncertain at present, as the ground is constantly shifting under the feet of the airline market these days.

Other upward-pushing items in August included hotel and restaurant services (0.04% CPI effect), health (0.03%), and food and beverages (0.03%). No components had a downward effect on the CPI during the month, although the subcomponent for airfares did lower the index marginally.

Inflation sits stubbornly in place but will yield in the end

The outlook is for inflation to remain close to 4.0%, the upper deviation threshold of the CBI’s inflation target, for a while to come. According to our preliminary forecast, the CPI will rise 0.4% in September, followed by a 0.2% increase in October and another 0.2% increase in November. If this forecast materialises, headline inflation will measure 4.3% once again in November.  Thereafter, the outlook is for a steady decline, with inflation converging on the CBI’s 2.5% target in Q3/2022.

If the ISK appreciates more in coming quarters than we have forecast, inflation could subside faster than we anticipate. On the other hand, inflationary pressures from wages and/or house prices could turn out stronger than we assume, causing inflation to be more persistent in the coming term. It is also worth noting that pandemic-related price hikes abroad could cause imported goods prices to rise more than we have assumed here.


Bergthora Baldursdottir



Jon Bentsson

Chief economist