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Our forecast: inflation to measure 5.1% in November

The outlook is for the CPI to rise by 0.6% month-on-month in November, bringing headline inflation to 5.1%, if our forecast materialises. Inflation is driven mainly by house prices and imported inflation at present.

We project that the consumer price index (CPI) will rise by 0.6% month-on-month in November, and that twelve-month inflation will measure 5.1%, up from 4.5% in October. This would be the highest inflation measurement in nine years. We expect inflation to rise even further in coming months before starting to taper off. The main causes of higher inflation are rising house prices and imported inflation, which has come to the fore in the recent term. The outlook has deteriorated since the last forecast, and we now expect inflation to return to the Central Bank’s (CBI) inflation target at the beginning of 2023. Statistics Iceland (SI) is scheduled to publish its November CPI measurement on 25 November.

House prices keep climbing

As in recent months, house prices are the main driver of the rise in the CPI in November. Imputed rent, which to a large extent is a reflection of developments in house prices, has risen nearly 11% since March 2021. We expect that trend to continue for a few months before rising interest rates and other policy actions by the CBI start to affect it. We project that imputed rent will rise by 1.2% month-on-month (0.2% CPI effect).

The housing market is characterised by demand pressures at present, and prices have risen by 15% nationwide in the past twelve months. The CBI has begun to take action, however, with policy rate hikes and other measures. Eventually, the tighter regulatory framework for lending and the higher policy rate will affect the market, as house price increases far in excess of wage rises are not sustainable in the long run.

Imported inflation makes its presence felt

Apart from the housing component, the travel and transport component will be the strongest upward-pushing CPI item in November. Within that component, petrol prices weigh heaviest, with an increase of 2.4% (0.07% CPI effect), according to our measurement. Petrol prices are up more than 18% in 2021 to date, driven by surging global fuel prices. It is difficult at the moment to predict how airfares will develop; for instance, they fell month-on-month in October, in defiance of our forecast. That said, in view of stronger demand and rising oil prices, we expect airfares to rise by 3.4% in November (0.06% CPI effect).

Other key items set to rise between months are furniture and housewares, up 1.2% (0.08% CPI effect); food and beverages, up 0.4% (0.06%); and clothing and footwear, up 0.6% (0.02%).

We have been quite concerned about imported inflation recently. Prices abroad have been on the rise, and shipping costs have skyrocketed. In the past few months, we have seen imported inflation come to the fore, and our measurements indicate that November will be no exception. As the chart shows, inflation is not limited to Iceland these days. It is also high in most comparison countries.

The short-term inflation outlook has deteriorated

The short-term inflation outlook has deteriorated in recent months. Both price pressures in the housing market and rising input prices and shipping costs appear set to continue, with no end in sight. According to our preliminary forecast, the CPI will rise by 0.5 % in December, fall by 0.2% in January, and then rise by 0.6% in February. If this forecast is borne out, twelve-month inflation will measure 5.2% in February.

Thereafter, we expect further appreciation of the ISK, a slower increase in house prices, and perhaps flat or declining imported goods prices. Inflation will gradually start to lose steam but will not realign with the CBI’s 2.5% inflation target until the beginning of 2023. According to our forecast, inflation will average 4.2% in 2022 and 2.7% in 2023. Our long-term forecast is based on the assumption that the housing market will settle down and next year’s wage negotiations will result in moderate pay hikes.


Bergthora Baldursdottir




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