Spike in airfares the main driver of the CPI rise

The Transport division of the CPI has been under close scrutiny recently, owing to the surge in oil prices. This month, oil prices as such have little impact on the CPI measurement, but the same cannot be said about airfares. International airfares jumped 20% (0.52% CPI effect) month-on-month, far more than is typical for June and, in fact, the largest June increase in the history of SI data. This month’s rise is due partly to seasonal fluctuations, as airfares usually climb during the summer, but it probably reflects the recent surge in jet fuel prices as well.

Housing ranks second among drivers of the CPI increase. Imputed rent is the main catalyst there, rising by 0.6% (0.13%), about the same as in May. Restaurants and accommodation services rose 2.2% (0.12%), owing to a marked seasonal increase in accommodation prices.

Various other items rose as well, as can be seen in the chart. Food and beverages rose by 0.2% (0.03%) MoM, mostly due to increased dairy product prices.

Composition of inflation

Developments in the composition of inflation can be seen in the chart below. Of the 5.2% inflation rate measured in June, the housing component still accounts for the largest share, at 1.6%, although its contribution has been on the decline. Public services account for another 1.3%, after a surge at the turn of the year, when the per-kilometre charge on vehicle use was adopted and categorised under public services. Domestic goods explain 0.7% of inflation. On the other hand, imported goods reduce inflation by 0.3%, as their contribution is smaller than before, mainly because of Government measures that lowered fuel prices at the turn of the year and again in May.

The inflation outlook further ahead

• July: CPI to rise 0.3% (twelve-month inflation 5.2%) – Airfares increase for the peak season, while summer sales dampen price hikes for other items.
• August: CPI to rise 0.05% (twelve-month inflation 5.4% – End-of-sale effects counteract lower airfares.
• September: CPI to rise 0.3% (twelve-month inflation 5.5%) – Government measures expire and VAT on fuel rises, while airfares fall.

If our preliminary forecast materialises, headline inflation will measure 5.4% in August, thereby exceeding the threshold triggering a wage contract review. In our recent discussion of the labour market situation, we projected that the social partners would reach a modus vivendi and avoid terminating wage agreements.

Underlying inflation according to core indices rose as well in June, suggesting that underlying inflationary pressures are mounting. We expect imported inflationary pressures to be stronger in the next few months, owing to the Persian Gulf war. Peace negotiations are ongoing, prompting a steep drop in crude oil prices. Whether that drop will prove lasting is unknown, but we do expect a slight decline in fuel prices in the near future.