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Inflation ticks upwards to 6.7%

Inflation is still rising. It now measures 6.7%, its highest in nearly a dozen years, and is unlikely to subside to any marked degree until next year.

According to figures released recently by Statistics Iceland (SI), the consumer price index (CPI) rose 0.94% month-on-month in March, Headline inflation now measures 6.7%, up from 6.2% in February. It is Iceland’s highest inflation measurement since May 2010. The CPI excluding housing rose by 0.82% during the month, and twelve-month inflation thus measured was 4.6%.

The March measurement was below our forecast. We had projected that the CPI would increase by 1.1% MoM, whereas forecasts as a whole provided for rises in the 0.9-1.2% range. The main difference between our forecast and SI’s measurements lies in imputed rent, which rose more than we had expected. On the other hand, airfares remained flat, whereas we had forecast an increase.

House prices keep climbing

In keeping with the recent pattern, the housing component weighed heavily in the March rise in the CPI. The MoM increase was due largely to a 2.0% jump in imputed rent (0.35% CPI effect), which is mainly a reflection of house prices.

Imputed rent is a composite item that combines the market price of housing and indexed mortgage lending rates. For the past two months, the interest rate portion has offset the rise in house prices. House prices rose by a total of 2.3% MoM, according to SI data. The MoM rise was largest in regional Iceland (2.5%) and smallest for detached housing in the capital area (2.1%). The price of capital area condominium housing rose by 2.1% MoM.

House prices nationwide have jumped 19.1% in the past twelve months, the fastest increase by this measure since autumn 2017. The largest increase by this measure has been in the price of single-family homes in greater Reykjavík (21.1%). Condominium prices in the capital area have risen more than 19% over the same period, and prices in regional Iceland are up 17.8%. At the moment, there appears to be no end in sight to the surge in house prices throughout Iceland.

Imported inflation and end-of-sale effects

Apart from the housing component, the main driver of inflation in March was fuel prices, which soared by 8.2% (0.27% CPI effect) concurrent with the sanctions imposed on Russia in the wake of its invasion of Ukraine.

Clothing and footwear prices were up 5.3% (0.2%), owing to end-of-sale effects, which were negligible in February. Food and beverage prices rose by 0.6% (0.1%) as a result of price hikes abroad, yet this was the component’s smallest increase since November. Prices of other goods and services also rose MoM, by 0.7% (0.05%).

Stubbornly high inflation still on the horizon

Domestic inflation is at its highest since May 2010. The housing component and imported goods are the main drivers of the rise in the CPI at the moment and will presumably remain so in the near future. Imported inflation stems from two causes at present: the war in Ukraine and the lingering impact of the pandemic on global supply chains and shipping.

The outlook is for inflation to remain high in the coming term and not subside to any marked degree until next year. According to our preliminary forecast, the CPI will rise 0.7% in April, 0.6% in May, and 0.5% in June, pushing headline inflation up to 7.3% by June.

It is still enormously uncertain how long foreign price hikes will persist and to what degree the ISK will appreciate to offset them, but we do expect an appreciation later this year, when more tourists start visiting the country.

It is extremely important for developments in the CPI – and one of the key assumptions underlying our long-term forecast – that house price inflation should begin to ease soon, thereby offsetting higher imported inflation. We also assume that the wage agreements up for negotiation late this year will result in relatively modest pay rises. According to our forecast, inflation will average 6.9% in 2022, 4.2% in 2023, and 2.8% in 2024.


Bergthora Baldursdottir