Inflation still rising as winter approaches
We project that the consumer price index (CPI) will rise by 0.2% month-on-month in November, and that twelve-month inflation will measure 3.7%, up from 3.6% in October. This would be the eighth consecutive monthly rise in inflation, which measured 1.7% at the beginning of 2020.
CPI to rise by 0,2% in November
Furniture and housewares prices set to decline
Imputed rent surges
Airfares rise, in a departure from the usual November pattern
Slight MoM rise in petrol prices
In four of the past six years, the price level has fallen between October and November. Two major sales events of the year fall in November – Singles’ Day on 11 November and Black Friday on the fourth Friday of the month – although they are relatively new to Iceland. The ISK has appreciated by nearly 2% in November to date, after a virtually uninterrupted slide since the summer. It appears as though pressure on the exchange rate has eased temporarily, after a spate of large-scale currency purchases by foreign investors and record-breaking FX market intervention from the Central Bank (CBI) earlier this autumn. We forecast that inflation will average 2.9% in 2020, 3.5% in 2021, and 2.6% in 2022.
In recent years, airfares have been one of the main downward-pushing components of the CPI during the month of November, but not in 2020. Because of the COVID-19 pandemic, airfares have behaved very differently this year, falling steadily since April (-7.3%). House prices are forecast to rise by 0.5% MoM, pushing the CPI upwards by 0.07%. Furniture, housewares, and other related goods are set to decline MoM, however, as some stores are holding sales on these items (-0.02% CPI effect).
Inflation above target in the coming term
We forecast that the CPI will rise by 0.2% in November and 0.4% in December, and then fall by 0.4% in January. If our forecast is borne out, inflation will be relatively high in the coming term and will remain above the target until the beginning of 2022. We project that twelve-month inflation will measure 4% in December and 4.4% in January. Headline inflation is forecast to rise in January 2021 despite a drop in the index because the CPI fell even more steeply (-0.7%) in January 2020.
The inflation outlook will continue to deteriorate in coming months, and inflation looks set to be well above the CBI’s 2.5% target. Market agents’ short-term inflation expectations have risen since the CBI’s last survey, although long-term expectations are still at target. The effects of the ISK depreciation earlier this year, coupled with rising domestic cost items, will give inflation a freer rein in the near term, although pressures will recede as the summer approaches. We project that inflation will continue to rise in Q1/2021 and then ease steadily thereafter. Our forecast is based on two main assumptions: that a COVID-19 vaccine will be on the market by mid-year and that the tourism industry will fare better next summer than it did in 2020. The ISK will therefore appreciate over the course of 2021, and at the same time, the slack in the economy will reduce domestic inflationary pressures.
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