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Our forecast: inflation to measure 4.0% in April

The outlook is for a month-on-month rise in the CPI in April; however, twelve-month inflation will ease during the month if our forecast materialises. House prices and rising food prices explain most of the April CPI increase. The outlook is favourable, and inflation will probably fall back to the Central Bank’s (CBI) 2.5% target by the beginning of 2022.


  • We forecast a 0.2% rise in the CPI in April

  • Food and beverage prices rise MoM

  • Housing component pushes upwards

  • Inflation to start falling later this year

  • Key uncertainties are the ISK, the housing market, and wage pressures

We project that the consumer price index (CPI) will rise by 0.2% month-on-month in April, and that twelve-month inflation will measure 4.0%, down from 4.3% in March. It appears that inflation has peaked for the present and will taper off relatively quickly over the course of this year, falling below the Central Bank’s (CBI) 2.5% target at the beginning of 2022. Statistics Iceland (SI) is scheduled to publish the April CPI on 29 April.

Housing and food push upwards

The housing component is the main driver of the April rise in the CPI. The market is quite lively at present. Imputed rent is based on two main factors – house prices and the impact of mortgage interest expense – which are engaged in a tug-of-war at the moment. Our measurements suggest that the housing component will rise by 0.35% (0.11% CPI effect) in April. Within that component, the most pronounced change is in imputed rent, which is set to rise by 0.5% (0.08% CPI effect), owing to a 0.8% rise in house prices and an offsetting 0.3% decline in interest rates.

The second biggest driver of the CPI increase in April is food and beverage prices, which we project to rise by 0.2% (0.03%), mainly because the agricultural pricing committee has decided to raise milk and butter prices in response to rising production costs.

Apart from housing and food/beverages, MoM changes in the CPI should be relatively modest. Other upward-pushing items are recreation and culture (0.02% CPI effect) and travel and transport (0.02%). We do not anticipate upward pressure from petrol prices in April, as they have risen strongly in recent months. This accords with developments in global fuel prices, which have tapered off in recent weeks after soaring in the past few months. We do not expect international airfares to rise, either, although developments have been difficult to predict because of limited flight offerings during the pandemic.

Inflation at target by the beginning of 2022

We expect inflation to ease steadily as 2021 advances, with the CPI rising by 0.2% in May, 0.3% in June, and 0.1% in July. If our forecast materialises, headline inflation will measure 3.5% in July. Thereafter, we project that it will decline further, falling below the CBI’s 2.5% target at the beginning of 2022. For the two years to follow, the outlook is for target-level inflation.

This forecast is based on the assumption that the ISK will appreciate in coming quarters. It has held its ground in recent months, and we think it will strengthen later this year, when tourism-generated revenues hopefully start to flow into the country. Further appreciation is likely in the next few years, with sunnier times for the economy more generally.

On the other hand, housing market activity is brisk, and the outlook is for wage hikes in the coming term. Furthermore, COVID-related price movements abroad could push domestic prices upwards. For instance, news reports of a shortage of shipping containers in China have pushed the price of container transport to Europe upwards in recent months. If this trend continues, it could cause imported goods prices to rise more than we have assumed in this forecast.


Bergthora Baldursdottir