Skammvinnur verðbólgutoppur í janúar

We project that the consumer price index (CPI) will fall by 0.2% month-on-month in January, pushing headline inflation up to 4.2% from 3.6% in December and 3.5% in November. This spike in headline inflation in the face of a MoM dip in prices is due to base effects from January 2020, when the CPI fell much more (-0.7%) than we expect it to this month.


Summary

  • Our forecast: CPI to decline 0.2% in January

  • Petrol prices to continue rising month-on-month

  • Seasonal sales on various consumer goods to push the CPI down in January

  • Airfares set to rise in January

  • Changes in the tax structure to cause moderate increases in various CPI items

In recent years, the CPI has fallen decisively in January, but this year we expect a more modest decline. Headline inflation rose markedly in 2020, owing largely to the side effects of the COVID-19 pandemic. Foreign currency inflows slowed to a trickle with the virtual halt in tourist arrivals, causing the ISK to depreciate sharply against major currencies – by 14% against the euro, 4% against the US dollar, and 7% against the pound sterling. The depreciation caused imported consumer goods prices to rise, thereby unleashing inflation. Developments in domestic inflation will depend in part on the path the pandemic takes, and the sooner economies around the world normalise, the sooner we can expect inflation to ease in Iceland. ÍSB Research forecasts that inflation will average 3% this year and 2.2% in 2022.

In recent years, post-holiday sales on consumer goods such as furniture, electronic equipment, and clothing have pushed the CPI firmly downwards in January. It is well known that retail stores use the month of January to sell off older goods at discounts to make space for new inventory. According to our forecast, the furniture, housewares, etc. component will decline by nearly 4% MoM (-0.23% CPI effect), and the clothing and footwear component will fall considerably more, or by nearly 9% MoM (-0.32% CPI effect) while drugs and medicinal products are forecast to decline in price by 3.17% between months (-0.04%).

The real estate market was lively in H2/2020, buoyed up by steep interest rate cuts that pushed house prices upwards. Imputed rent, which reflects house prices and the impact of mortgage lending rates, is projected to rise by 0.6% in January (0.1% CPI effect). The former of these, house prices, will tend to push upwards this month, whereas mortgage lending rates will push downwards.

Longer days, lower inflation

We expect the CPI to rise by 0.6% in February, 0.3% in March, and 0.2% in April. If our forecast materialises, inflation will remain high in the coming term – averaging 4%, for instance, in Q1/2021. The outlook further ahead has improved markedly, however, and it is reasonably likely that inflation will be close to the Central Bank of Iceland’s (CBI) target in H2/2021.

The question of when the Icelandic economy rights itself remains unanswered, depending as it does on how the pandemic behaves. Vaccines are on the market, and Iceland has begun to inoculate high-risk individuals. If Icelanders are successful in inoculating a large share of the population before the peak tourist season, it could well be that the country will be high on travel-hungry foreigners’ list of potential destinations – particularly if the pandemic does not come roaring back this spring. If tourists do return in large numbers, the associated foreign currency inflows could be of pivotal importance to a small economy like Iceland, as the ISK is likelier to appreciate as visitor numbers rise. But inflation will remain high in the near term. In addition to the effects of the ISK depreciation are the extra costs associated with handsome contractual pay rises and the inflationary impact of a brisk housing market. Nevertheless, we expect inflation to subside as the days grow longer. In fact, the outlook is for inflation to be just below target, on average, in the latter half of the forecast horizon.

Author


Tryggvi Snær Guðmundsson


Economist

Contact

LEGAL DISCLAIMER

This report is compiled by Islandsbanki Research of  Islandsbanki hf.

The information in this report originates in domestic and international information and news networks that are deemed reliable, along with public information, and Islandsbanki Research’s own processing and estimates at each time. The information has not been independently verified by Islandsbanki which therefore does not guarantee that the information is comprehensive and accurate. The views of the authors can change without notice and Islandsbanki holds no obligation to update, modify or amend this publication if assumptions change.  

This publication is only published for informational purposes and shall therefore not be viewed as recommendation/advice to make or not make a particular investment or an offer to buy, sell or subscribe to specific financial instruments. Islandsbanki and its employees are not responsible for transactions that may be carried out based on information put forth in the report. Before making an investment decision, recipients are urged to seek expert advice and get well acquainted with the investments market and different investment alternatives. There are always financial risks related to investment activities, including risk due to international investments and fluctuations in the exchange rate of currencies. Investors’ investment objectives and financial position vary. Past performance does not indicate nor guarantee future performance of an investment. 

The research report and other information received from Islandsbanki are meant for private use only. The materials may not be copied, quote or distributed, in part or in whole, without written permission from Islandsbanki.

This report is a short compilation and should not be considered to contain all available information on the subject it discusses. 

Supervisory body: The Financial Supervisory Authority of Iceland (www.fme.is).    

UNITED STATES

This report or copies of it must not be distributed in the United States or to recipients who are citizens of the United States against restrictions stated in the United States legislation. Distributing the report in the United States might be seen as a breach of these laws.

CANADA

The information provided in this publication is not intended to be distributed or circulated in any manner in Canada and therefore should not be construed as any kind of financial recommendation or advice provided within the meaning of Canadian securities laws.

OTHER COUNTRIES

Laws and regulations of other countries may also restrict the distribution of this report. 

Further information regarding material from Islandsbanki Research can be accessed on the following website: http://www.islandsbanki.is.