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Inflation ticks upwards in April, defying forecasts

This morning’s inflation figures took us by surprise. Headline inflation inched upwards, flying in the face of official forecasts, and most components rose month-on-month. The main driver of inflation this month is the housing market. House prices are probably in flux at the moment, and this month’s increases will probably reverse in the next few months.

According to newly published figures from Statistics Iceland (SI), the CPI rose 1.3% month-on-month in April, causing headline inflation to edge upwards from 9.8% to 9.9%. Twelve-month inflation excluding housing also rose marginally, to 8.7%. The April measurement is well above analysts’ forecasts, which lay in the 0.7-1.0% range, including our own forecast of a 0.7% MoM rise in the CPI. A number of components contribute strongly to this month’s spike, chiefly to include housing, food, furniture and housewares, and airfares.

House prices fluctuating widely

House prices were the strongest driver of this month’s rise in the CPI. The house price index, published last week, gave a good indication that prices would rise, but the actual increase was much larger than the index suggested. Imputed rent rose 2.5% (0.46% CPI effect), its largest increase since June 2022. Both the interest component and house prices pushed upwards this time. The market price of housing rose by 1.8% and the interest component by 0.7%. Closer scrutiny of the numbers shows that the price of single-family homes in greater Reykjavík rose 2.3% MoM and condominium prices by 1.1%. But the surge in prices was not limited to the capital area: prices in regional Iceland rose by a full 3% between months.

Even so, the year-on-year increase in house prices continues to lose steam, which means that prices rose more in April 2022 than they did this month. YoY house price inflation now measures 12.4% nationwide, with prices in regional Iceland rising the fastest over the twelve-month period, at 17.1%, followed by multi-family homes (10.9%) and single-family homes (10.5%) in the capital area. The newest figures indicate that the market is still humming along, but in a highly volatile environment, this month’s numbers – detached home prices in particular, and now, prices in regional Iceland as well – should be taken with a pinch or two of salt. These brand-new price hikes could reverse in the next few months.

Most components push upwards

Most CPI components pushed the index upwards this month. After the housing component, the travel and transport component increased the most. The component as a whole rose by 2% (0.31% CPI effect), owing mainly to airfares, which rose 19% (0.36%), in keeping with the usual seasonal pattern. But airfares rose in March as well and have now soared 23.5% in the past two months combined. Typically, they taper off in May. Pulling gently against the rise in airfares were fuel prices (-0.06% CPI effect) and motor vehicle prices (-0.02% CPI effect).

Food prices jumped 1.5% (0.23%), mostly because of higher dairy product prices (0.10% CPI effect), but also due to price hikes in other food items such as meat and fish. Furniture and housewares rose in price as well, by 1.9% (0.12% CPI effect), with electrical equipment prices weighing heaviest in the increase, at 2.4% (0.04%).

A setback for disinflation?

These inflation figures took us aback, as many different items pulled in the same direction: upwards. Core inflation, which excludes volatile items, rose by all measures in April. This will not be good news for the Central Bank’s (CBI) Monetary Policy Committee (MPC), which pays close attention to core inflation in its assessment of underlying inflationary pressures.

The bright spot in an otherwise dark picture is that house prices and airfares were the strongest drivers of inflation this month, and both could reverse in the months to come. The usual pattern is for airfares to rise in March and April and reverse in part in May. It is harder to pinpoint the housing market situation and the volatility there. But it has to be considered more likely than not that this month’s spike in prices will settle back in coming months.

According to our preliminary forecast, the CPI will rise 0.4% in May, 0.6% June, and 0.3% in July, bringing headline inflation to 7.7% in July. This is a more modest decline than we had previously anticipated.


Bergthora Baldursdottir