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Inflation subsides; further easing on the horizon

Twelve-month inflation tapered off in March and is now below 10% again. Imported inflation has lost pace and looks set to keep falling in coming months. Headline inflation will continue to ease as large monthly increases drop out of twelve-month measurements.

According to newly published figures from Statistics Iceland (SI), the CPI rose 0.6% month-on-month in March, lowering headline inflation from 10.2% to 9.8%. Twelve-month inflation according to the CPI excluding housing fell, too, from 8.9% to 8.6%.

The March measurement is just below analysts’ forecasts, which lay in the 0.7-0.8% range, including our own forecast of a 0.7% MoM rise in the CPI. The main difference between our forecast and SI’s measurements lay in furniture and housewares prices, which fell, while we had projected an increase. Food prices increase was also less than we expected.

Imported inflation loses steam

The main upward-pushing item this month was the clothing and footwear component, which increased 4.3% (0.14% CPI effect), owing to the end-of-sale effects that commonly surface in March. Food and beverage prices rose 0.7% MoM (0.11% CPI effect), somewhat less than we had expected – and hopefully a sign of things to come. In 2023 to date, the food and beverage component has risen by nearly 4%, and in the next several months we expect grocery prices to climb much more slowly, owing to a stronger ISK and better balanced prices abroad.

The travel and transport component rose by 0.6% (0.10% CPI effect), with petrol prices falling 0.7% (-0.03%) and airfares rising 4.5% (0.09%). Airfares rose less than we had projected, and we therefore expect them to move higher in April. Other upward-pushing items included hotel and restaurant services, up 1.4% (0.07%), and other goods and services, up 0.9% (0.07%).

Imputed rent still climbing

The market price of housing rose by 0.1% MoM in March, after falling during the three months beforehand. Condominium prices in greater Reykjavík rose 0.3% between months, while single-family home prices in the capital area and house prices in regional Iceland fell by 0.2%. The interest subcomponent of imputed rent, which is based on the twelve-month average of indexed mortgage lending rates, pushed imputed rent upwards by 0.7% MoM. The combined impact of the two subcomponents – the market price of housing and indexed interest rates – is to increase imputed rent by 0.8% in March (0.15% CPI effect).

The contribution of the housing component to headline inflation has weakened significantly. Of the March inflation figure of 9.8%, the housing component accounts for 3.1%. The weight of imported goods also fell MoM and now accounts for roughly 2.5% of headline inflation. We hope this trend will continue in the coming term. The weight of domestic goods in inflation remained flat between months, at 1.8%, while the weight of services increased to 2.4%.

Inflation set to keep falling

We forecast that inflation will continue to fall in the coming term as months with hefty increases drop out of twelve-month measurements. According to our preliminary forecast, the CPI will rise by 0.5% in April, 0.3% in May, and 0.5% in June. bringing headline inflation to 7.5% in June. We project inflation to average 8.0% in 2023.

As is common knowledge, the Central Bank (CBI) Monetary Policy Committee (MPC) raised the policy interest rate by 1% last week in response to stubborn inflation. A long journey lies ahead, and a number of factors must be in sync in order to bring inflation back to the CBI’s 2.5% target. But today’s inflation measurement will probably come as a great relief to the MPC and boost the likelihood that the Committee’s monetary tightening phase will come to an end soon.


Bergthora Baldursdottir