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Inflation still climbing

Inflation now measures 7.2%, its highest in a dozen years. At the moment it is driven mainly by rising house prices and higher imported inflation, and it appears unlikely to subside to any marked degree until next year.

According to newly published figures from Statistics Iceland (SI), the CPI rose 1.25% month-on-month in April,  pushing headline inflation up to 7.2%, from 6.7% in March. It is Iceland’s highest inflation measurement since May 2010. Twelve-month inflation according to the CPI excluding housing measured 5.3% during the month.

The April measurement exceeds all published forecasts, which provided for a CPI rise ranging from 0.65% to 1.1% month-on-month. The main difference between our forecast and SI’s measurements lies in imputed rent, which rose far more than we had projected, and airfares, which also rose quite a bit more than we had anticipated.

House prices rise inexorably

In keeping with the recent pattern, the housing component weighed heavily in this month’s jump in the CPI. Imputed rent is the main driver of the increase, rising by 2.4% (0.45% CPI effect). In addition, the home maintenance and repair subcomponent rose by 2.2% (0.2%) in the wake of steep hikes in the price of imported inputs for maintenance, among other items.

House prices overall rose by 2.7% MoM, according to SI data. Prices in regional Iceland rose the most (3.4%), while capital area condominium prices rose the least (2.4%),  with single-family home prices in greater Reykjavík more or less splitting the difference, at 2.8% MoM.

House prices nationwide have jumped 19.1% in the past twelve months, the same as in March.  The YoY rise was unchanged between March and April despite the surge in prices between months because house prices started rising swiftly around this time in 2021.  In the past year, single-family home prices in greater Reykjavík have risen the most (20.4%), followed by condominium housing in greater Reykjavík, at 19.0%, and housing in regional Iceland, 18.4%. Prices appear to be climbing non-stop, with no sign of a let-up until the shortage of supply in the market is addressed. It is hoped that new properties will become available later this year.

Jump in airfares

Apart from the housing component, airfares weighed heaviest among April price hikes.  Air transport prices rose 21.6% (0.39% CPI effect), driven mainly by a 22.9% jump in international airfares. Even though we had not forecast such a surge for April, it comes as no surprise to us. We have been forecasting an increase in the air transport component for several months, but it has not materialised until how. The rise is probably due to two main factors: higher fuel prices and increased demand for air travel. Fuel prices also rose by 1% (0.04% CPI effect).

Food and beverage prices rose 1.3% MoM (0.20%), owing mainly to a 4.75% increase in dairy product prices (0.13%). This was expected, as the agricultural pricing committee announced a commensurate increase in wholesale dairy prices on 1 April. Apart from dairy products, oils and fats rose in price (3.2%), as did vegetables (2.4%) and fruit (1.7%). Prices of other goods and services also rose MoM, by 1% (0.07%).

Stubbornly high inflation still in the offing

As the chart below indicates, the housing component is the main driver of inflation, although imported inflation has also picked up strongly. Of the 7.2% headline inflation figure for April, 3% stems from housing, 1.6% from imported goods, 1.7% from domestic services, and just under 1% from domestic goods.

Inflation is now at its highest since May 2010. The housing component and and imported goods are the main catalysts at the moment, and there is nothing on the horizon to indicate that either will subside in the near future. As a result, we do not expect inflation to ease to any marked degree before next year. According to our preliminary forecast, the CPI will rise 0.8% in May, 0.6% June, and 0.3% in July, pushing headline inflation up to 8.2% by July.

It is enormously uncertain how long foreign price hikes will persist and to what degree the ISK will appreciate to offset them, but we do expect an appreciation later this year, when more tourists start visiting the country and the current account begins to show a surplus once again.

It is extremely important for developments in inflation – and one of the key assumptions underlying our long-term forecast – that house price inflation should begin to ease later this year, thereby offsetting higher imported inflation. Another important assumption behind our forecast is that the wage negotiations slated for late this year result in relatively moderate pay hikes. According to our forecast, inflation will average 7.2% in 2022, 4.6% in 2023, and 2.9% in 2024.


Bergthora Baldursdottir