We project that the consumer price index (CPI) will rise by 0.8% month-on-month in February, and that headline inflation will ease from 6.7% to 6.1%. The end of seasonal sales will affect the measurement, as is typical in February, and the housing component will rise somewhat, driven by imputed rent and higher refuse collection prices. Statistics Iceland (SI) will publish the CPI on 28 February.
Our forecast: inflation to measure 6.1% in February
According to our forecast, inflation will continue to fall in February and in coming quarters, and at a very rapid pace in the months just ahead. It will not realign with the Central Bank’s (CBI) target in the next few years, according to our long-term forecast, but will be very close to it in 2026.
Housing component a key driver of inflation
The housing component will weigh heavily in the February rise in the CPI. The component as a whole will increase 0.9% (0.26% CPI effect), owing mainly to imputed rent and the subcomponent SI calls “other services relating to the dwelling”. We project that imputed rent will rise by 0.8% month-on-month (0.15% CPI effect) in February, with house prices and the interest component each rising by 0.4%. We then expect house prices to rise slightly in coming months because of Government assistance to Grindavík residents, but these price hikes will probably be relatively modest.
The item “other services relating to the dwelling” will also rise steeply between months, or by 4.9% (0.08% CPI effect), because of price list increases. These services include refuse collection, sewerage services, and cold water supply. This year’s increase is set to take place in February instead of January because, according to SI, the first payments under the new tariff will be made in February.
End-of-sale effects
As usual for February, the end of seasonal sales will affect the CPI measurement for the month, as this year’s January sales were quite deep. According to our forecast, clothing and footwear will rise in price by 6.5% MoM (0.23% CPI effect) and furniture and housewares prices by 3.6% (0.20%). We also expect end-of-sale effects to stretch into March.
Other key items that rise MoM are food and beverages, up a relatively moderate 0.25% (0.04%) because of a stronger ISK and smaller price hikes abroad. The travel and transport component is set to rise by 2.5% (0.04% CPI effect), reflecting the tug-of-war between marginally lower petrol prices and higher airfares. Petrol prices will fall by 0.4% (-0.01%), according to our measurement, but are likely to pick up in coming months, driven by higher prices for Brent crude. Airfares are set to rise by 2.2% (0.04%), after a sizeable drop in January.
The inflation outlook
Inflation is falling swiftly and currently measures 6.7%. We expect it to keep declining in coming months, and quite quickly at that. According to our preliminary forecast, the CPI will rise 0.6% in March, and 0.7% in April, and 0.3% in May. If these projections materialise, inflation will measure 5.3% in May. The reason for such rapid disinflation is that large monthly rises from H1/2023 are dropping out of twelve-month measurements. The main uncertainty in the short-term forecast is the housing market, including the question of when the new method for calculating imputed rent kicks in and how it initially affects measurements. SI plans to publish an article on the topic in March.
According to our long-term forecast, inflation will average 5.2% in 2024, 3.2% in 2025, and 3.0% in 2026. As these numbers show, it will not reach the CBI’s target during the forecast horizon. The main uncertainty further ahead centres on developments in wage negotiations. Earlier this week, we published an analysis of the interplay between wages and inflation.
Author
Bergthora Baldursdottir
Economist
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