Inflation tapers to 5.2%

Headline inflation eased in April, developing more or less in line with our forecast. This month’s rise in the CPI was driven primarily by fuel prices, airfares, and imputed rent, whereas prices in most other categories were virtually flat. The situation in the months ahead is highly uncertain, and developments will depend largely on the war in the Persian Gulf.

According to newly published figures from Statistics Iceland (SI), the CPI rose 0.81% month-on-month in April, lowering headline inflation from 5.4% to 5.2%. Twelve-month inflation excluding housing eased as well, from 4.9% to 4.8%.

The measurement turned out slightly above our forecast, which provided for an increase of 0.7%, while forecasters overall projected a rise of 0.7-1.1%. The main difference between our forecast and SI’s measurement stemmed from imputed rent, which rose more than we had projected. Interestingly, many key categories in the CPI – including food, household equipment, and clothing – showed little month-on-month change in prices.

The highlights

Transport was the main catalyst of the April rise in the CPI. The price of fuel (now labelled fuels and lubricants for personal transport equipment) rose 14% (0.37% CPI effect), in line with our forecast. There was also a 6% (0.15%) increase in airfares, the subcomponent showing the widest range of analysts’ forecasts. In general, airfares rise more in April because of the Easter holidays, but this year the holidays came a bit early, and the April increase was correspondingly smaller.

Rather unexpectedly, imputed rent rose by 0.8% (0.16%) MoM. Although this is a larger increase than we have seen in recent months, it lines up relatively well with the Housing and Construction Authority’s (HMS) rent price index.

Other key CPI components held largely stable between March and April, including food, clothing, household equipment, and entertainment. This is interesting, given the surge in fuel prices and the flood of media reports warning of rising shipping costs due to bottlenecks in the Strait of Hormuz.

The inflation outlook further ahead

The positive note in today’s inflation figures is that underlying inflationary pressures do not seem to be growing. All core indices declined year-on-year. Nevertheless, because of the geopolitical situation, we expect stronger imported inflationary pressures in the months ahead. The size and duration of the increase will depend for the most part on how the Persian Gulf war evolves.

Our preliminary forecast for the next few months is as follows:

  • May: CPI to rise 0.1% (twelve-month inflation 5.1%) – Reduction in value-added tax on fuel from 24% to 11% somewhat offset upward pressures.
  • June: CPI to rise 0.6% (twelve-month inflation 4.9%) – Fuel prices continue to rise, but less strongly. Airfares and restaurant/accommodation prices rise due to seasonal fluctuations.
  • July: CPI to rise 0.3% (twelve-month inflation 4.9%) – Airfares increase for the peak season, while summer sales dampen price hikes for other items.

If our preliminary forecast materialises, inflation will measure 4.9% in July. According to our forecast, inflation will inch upwards in August and rise still more in September, when the Government measures expire. If so, headline inflation according to our baseline forecast will be above the 4.7% threshold provided for in the assumptions clause in wage agreements. The Central Bank’s Monetary Policy Committee will have today’s measurement in hand when it sets the policy rate on 20 May, and we therefore expect a rate hike at that time.

Author

Bergthora Baldursdottir

Economist

Contact

Related content