Inflation still holding steady

According to newly published figures from Statistics Iceland (SI), the CPI rose 0.23% month-on-month in March, lowering headline inflation to 2.1% from last month’s rate of 2.4%. It therefore remains below the Central Bank’s (CBI) inflation target. Inflation excluding housing measured 1.8% during the month.

According to the press release published yesterday by SI, the calculation of the March CPI went smoothly, but SI expects challenges to surface in the measurements for April and the months and thereafter, for as long as the current situation persists. On the other hand, CPI weights will not be changed even though various goods and services will temporarily be unavailable. This assumes, of course, that changes in consumption are indeed temporary and will eventually normalise.

The March CPI measurement is slightly below our forecast of a 0.3% month-on-month rise in the index. The main item that surprised us was the air transport component, as airfares fell considerably more than we had anticipated.

Travel and transport pull inflation downwards

The travel and transport component, which fell by 1.5% (-0.21% CPI effect), was the main reason the CPI turned out no higher than it in fact did during the month. Airfares fell by 9.2% (-0.16% CPI effect), but they were unusually difficult to predict in our measurements. In general, airfares rise in March, but SI’s March measurement reflects both COVID-19 and the plunge in oil prices. Petrol prices fell MoM by 2.6% (-0.09% CPI effect), and the cost of motor vehicle operation fell 1.2% (-0.08%).

The main upward-pushing item in March was clothing and footwear, which rose by 4.5% (0.19% CPI effect), bringing prices roughly back to where they were before the winter sales. In addition, food and beverages rose in price by 0.5% (0.06%), probably due to the initial impact of the depreciation of the ISK. Prices of other goods and services also rose MoM, by 0.3% (0.02%).

Housing market stands firm

 The housing component contributed strongly to the rise in the CPI in March. The component as a whole rose 0.5% (0.16% CPI effect), as imputed rent (largely a reflection of house prices) rose by 0.85% (0.14%) and paid rent by 0.51% (0.02%). If SI’s figures are any indication, the housing market is still relatively buoyant. House prices rose 1.2% nationwide according to the March CPI, although it should be borne in mind that SI’s March figures are based on purchase agreements from December through February. Next month’s measurements will probably be affected by the COVID-19 situation, and it will be interesting to see what impact the epidemic has on the market.


Twelve-month house price inflation now measures 5.5%, its highest since May 2019. Capital area house prices have risen 5.4% in the past year, albeit outpaced by prices in regional Iceland, which have risen 6.7%. In real terms, house price inflation measures 3.3% in greater Reykjavík and 4.6% in regional Iceland. With declining inflation, the real rise has been larger in recent months than it was for most of 2019.

Inflation set to rise above target

We expect the CPI to rise by 0.4% in April, 0.3% in May, and 0.3% in June, leaving inflation at 2.1% in June 2020. We expect it to rise thereafter, overtaking the CBI’s target at mid-year as a result of exchange rate pass-through. The ISK has depreciated by 10% year-to-date. Headline inflation will measure 3.2% by the end of the year, according to our forecast. It will then begin to taper off again around mid-2021, measuring 2.3% by the year-end.

The main uncertainties in the inflation outlook are these:

  • potential ISK depreciation (upside risk)
  • global deflation (downside risk)
  • reduced domestic inflationary pressures (downside)
  • stagnation/decline in house prices (downside)


Bergthora Baldursdottir