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Inflation subsides to 4.4%, as we expected

House prices were the main driver of inflation in May. It appears that inflation has begun to ease and will taper off even more as the year advances. We expect it to align with the Central Bank’s (CBI) 2.5% inflation target around mid-2022.

According to newly published figures from Statistics Iceland (SI), the CPI rose 0.4% month-on-month in May, lowering headline inflation from 4.6% to 4.4%. Twelve-month inflation excluding housing measured 4% during the month. House prices have therefore begun to push the index more strongly upwards in the recent past. The May measurement is in line with our forecast.

House prices the main driver in May

There are strong demand pressures in the housing market at present, and house prices had a significant impact on the May CPI measurement. Imputed rent, which mainly reflects developments in house prices, accounted for around 2/3 of the CPI rise in May (0.25% of the 0.4% increase).

 Between months, the rise in house prices was greatest for single-family homes in greater Reykjavík (2.3%), whereas condominium prices rose 1.8% and housing in regional Iceland by 1.3%. Overall, the market price of housing rose 1.7% MoM. House prices as a whole have risen by nearly 6.4% year-to-date, according to SI measurements, which are based on a three-month moving average of prices according to registered purchase contracts.

According to SI data, twelve-month house price inflation now measures 12.7%, its highest in over three years. For detached housing in greater Reykjavík, the pace of house price inflation has quickened to nearly 20% year-on-year. Condominium prices in the capital area have risen more than 12% over the same period, and prices in regional Iceland are up by over 8%.

In our recently published macroeconomic forecast, we review the housing market situation and project developments to come. In our opinion, the outlook is for house prices to rise markedly in coming quarters. Thereafter, the pace will ease as mortgage lending rates rise and more new flats become available.

Other items affecting the CPI

Setting aside the housing component, there are a number of other items that contributed to the rise in the CPI. The most prominent among them are recreation and culture, on the one hand, and other goods and services, on the other. The recreation and culture component rose by 0.51% (0.05% CPI effect), and other goods and services rose 0.67% (0.05%), with the insurance subcomponent accounting for most of the latter increase. In addition, alcoholic beverage prices rose MoM (0.03% CPI effect), as did travel and transport (0.05%).

A few items declined between months, and it appears that the appreciation of the ISK has begun to affect measurements to a degree. Furniture and housewares prices fell by 0.36% MoM (-0.02% CPI effect); furthermore, food prices declined (-0.04%), fruit in particular, but because beverage prices rose, the food and beverages component as a whole did not fall. In addition, postal and telephone services prices declined (-0.03% CPI effect).

Inflation outlook favourable

We are of the view that inflation peaked in April and will continue to ease gradually as the ISK appreciates. According to our preliminary forecast, the CPI will rise 0.3% in June, 0.1% in July, and 0.4% in August. If the forecast materialises, inflation will measure 4.2% in August. We expect it to align with the CBI’s 2.5% inflation target around mid-2022.


The main assumption underlying our forecast is that the ISK will appreciate in coming quarters, which we expect to happen when tourists start visiting the country once again.

On the other hand, if house prices and wages rise excessively, inflation could turn out more stubborn than we have assumed in our forecast. It is also worth noting that price movements abroad and rising shipping costs due to the pandemic could affect domestic prices more than we currently anticipate.


Bergthora Baldursdottir



Jon Bjarki Bentsson

Chief economist