Inflation uptick

Twelve-month inflation measured 8.0% in November, inching marginally upwards month-on-month, as we had forecast. The outlook is for a slight additional increase in December, followed by a downward trend in 2024. Inflation will probably fall at a relatively quick pace in H1/2024, when large rises from the first half of this year drop out of the twelve-month CPI measurement.

According to newly published figures from Statistics Iceland (SI), the CPI rose 0.4% month-on-month in November, bumping headline inflation upwards from 7.9% to 8.0%. Twelve-month inflation according to the CPI excluding housing is now 7.2%.

The November measurement is in line with our forecast of a 0.4% rise in the CPI. Overall, analysts’ forecasts lay in the 0.3-0.5% range. The main drivers of the November CPI measurement are the rise in house prices and an offsetting decline in airfares.

House prices on the rise

The main item that pushed the CPI upwards in November was imputed rent, which rose 2.1% (0.40% CPI effect). Imputed rent is a composite measure of housing market prices plus an interest component based on indexed mortgage rates. House prices rose 1.4% MoM in November, and the interest component rose by 0.7%.

Housing market prices have therefore risen more than the house price index, which was published earlier this month and showed an increase of 0.9% MoM. The difference between the two measures is that SI includes house prices in regional Iceland, which rose by 1.9% MoM. Detached housing in the greater Reykjavík area rose the most, however, jumping 2.7% MoM, while capital area condominium prices increased 0.7% between months.

Year-on-year house price inflation has gained pace slightly in recent months and currently measures 3.9%. Even so, this is a radical shift from the situation in summer 2022, when the twelve-month rise in prices hit 25%. In the past year, it is the price of housing in regional Iceland that has risen the most, at 7.8%. Next in line are capital area condominium prices, are up 2.6% in the past year, followed by detached home prices in the capital area, which have increased by 1.9% over the same period.

Other drivers of the CPI rise

Actually, most other CPI components held broadly steady this month. Apart from housing, the main driver of inflation in November is the clothing and footwear component, which rose by 1.5% (0.06% CPI effect). Other key upward-pushing items are furniture and housewares, up 0.7% (0.04%); hotels and restaurants, up 0.4% (0.02%); and food, up 0.2% (0.02%).

The most prominent downward-pulling item for the month is the travel and transport component. The component as a whole declined by 1.6% (-0.24% CPI effect), with airfares falling by 12.2% (-0.24%) and fuel prices by 0.8% (-0.02%). However, the repair and maintenance subcomponent of travel and transport rose by 2.1% (0.04%).

The inflation outlook

Our inflation forecast is unchanged for the present. We expect headline inflation to climb a little in December and then start falling in early 2024. According to our preliminary forecast, the CPI will rise 0.8% in December, 0.4% in January, and 0.8% in February. If these projections are borne out, twelve-month inflation will measure 7.1% in February. We then expect it to fall fairly quickly after the turn of the year, when large monthly increases drop out of twelve-month measurements. According to our long-term forecast, inflation will average 6.1% in 2024 and 3.9% in 2025.

The inflation outlook remains uncertain, however. The near-term situation depends heavily on house prices and imported inflation. If these two items remain stubborn, headline inflation could turn out higher than is forecast here. Further out the forecast horizon, other uncertainties will be added to the mix. Looming large among them are the forthcoming wage negotiations, as contracts affecting the vast majority of the labour market are set to expire in the near future.


Bergthora Baldursdottir