Key drivers of inflation in June

Imputed rent has outpaced forecasts recently, and we forecast that it will rise by 0.7% in June (0.14% CPI effect). Part of that rise will probably stem from an increase in short-term rentals as the peak tourist season approaches, as data from the Housing and Construction Authority (HMS) indicate that far more rental leases expired in May than in April. If our forecast materialises, rent prices will be the biggest contributor to this month’s increase in the CPI. Nonetheless, we project that the average MoM rise in imputed rent will average around 0.5% over the next several months.

Airfares will behave as usual, rising over the summer months. According to our forecast, they will increase 5.2% in June (0.12% CPI effect), weighing in as the second-largest contributor to the rise in the CPI. The spike in airfares reflects a seasonal jump in demand for travel, as Icelanders head overseas for summer holidays and tourists flock to Iceland for the same reason. The price of fuel, another subcomponent of the travel and transport component, will fall by 0.67% (-0.02% CPI effect), owing mainly to lower global oil prices. Oil prices have actually been creeping upwards in the past few days, but given the general downward trend in recent months, we expect fuel prices to keep falling in the months ahead.

Another item that usually increases during the peak tourist season is hotel and restaurant services. We expect prices to rise 1.9% (0.10%) MoM, about the same as has been seen in the month of June in the past several years.

Food price inflation to subside

We forecast that food and beverage prices will rise by 0.27% in June, as the Icelandic Federation of Labour’s (ASÍ) leading grocery price indicator increased by that amount between May and June. Domestic goods will probably drive the increase, as a stronger ISK has helped contain imported goods prices in the recent term. If our forecast materialises, it will be the smallest MoM rise in food prices since November 2024, when the food and beverages component actually fell by 0.04%. Most likely, the wage rises that took effect in H1 have already come largely to the fore, together with the impact of other cost increases. We do not expect food prices to fall to any marked degree or even to hold steady in the near future, but we do think the pace of food price inflation will ease.

Near-term inflation outlook

According to our forecast, headline inflation will measure 3.8% in June, as it did in May. This puts it at its lowest point since year-end 2020. We expect it to taper off slightly more this summer, bottoming out at 3.5%. It will inch upwards again in the autumn, when one-off items such as last year’s cancellation of university fees and full subsidy of primary school meals drop out of twelve-month measurements. Our preliminary forecast for the months ahead is as follows:

• June: CPI to rise 0.2% (twelve-month inflation 3.5%) – Seasonal sales set to counterbalance higher airfares.
• August: CPI to rise 0.3% (twelve-month inflation 3.7%) – End-of-sale effects kick in, while airfares start falling. The cancellation of university fees drops out of twelve-month measurements.
• September: CPI to rise 0.2% (twelve-month inflation 4.2%) – Continued end-of-sale effects and declining airfares. Various price hikes due to fee schedule revisions. Free primary school meals drop out of twelve-month measurements.

If our forecast is borne out, inflation will measure 4.2% in September. It will then remain close to 4%, the upper deviation threshold of the inflation target, through the year-end. We are slightly more pessimistic about the near-term outlook than we were in our last forecast. The main reason is that in our preliminary forecast, we had assumed a smaller increase in June than subsequent measurements indicated. In our opinion, the key uncertainty in the months to come is imputed rent, which in recent months has defied analysts by outpacing their forecasts.

For 2026, we expect inflation to keep declining, coming to a halt around 3.5%, which is below the upper deviation threshold of the CBI’s inflation target but a percentage point above the target itself. We expect inflation to average 3.6% in 2026 and 3.5% in 2027.

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