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Our forecast: inflation to measure 6.8% in March

The outlook is for the CPI to rise by 1.1% month-on-month in March, pushing twelve-month inflation up to 6.8%, if our forecast materialises. Imported inflation will rise even further in coming months, but how long it will last is highly uncertain.

We project that the consumer price index (CPI) will rise by 1.1% month-on-month in March, and that twelve-month inflation will measure 6.8%, up from 6.2% in February. This would be Iceland’s highest inflation measurement since May 2010. We expect inflation to remain high in the months to come, but it goes virtually without saying that there is pronounced uncertainty afoot and conditions are quick to change, as they have been in the recent term. Statistics Iceland (SI) will publish the CPI for the month on 29 March.

House prices keep climbing

As in recent months, house prices are the main driver of the rise in the CPI in March. The housing component as a whole is set to rise by 0.9% (0.3% CPI effect), owing mainly to an increase in imputed rent. We project that imputed rent will rise by 1.5% month-on-month (0.26% CPI effect). The housing market is still white-hot, with strong demand pressures and very limited supply. According to Registers Iceland (RI), the house price index rose by 2.5% in February. This index provides a given slant on house prices, but it should be borne in mind that RI and SI’s measurements differ by nature. RI’s measurements apply to the capital area only, while SI calculates a three-month moving average for the entire country.

The Central Bank (CBI) has been raising the policy rate, which is now back to its pre-pandemic level of 2.75%. Until now, policy rate hikes have not had much impact on demand for housing. We think it likely, though, that the higher policy rate combined with other CBI measures will siphon off some of the demand pressures in the market sooner rather than later. These days, it is even more important for the CPI that house price inflation should ease soon, thereby offsetting the effects of higher imported inflation.

Imported inflation has started to make its mark

The March measurement looks set to show that imported inflation is on the rise. Travel and transport are expected to contribute most to the increase in the CPI during the month, rising by 2.5% (0.35% CPI effect), according to our forecast. The main driver here is petrol prices, which we expect to rise by 8% (0.25% CPI effect). Petrol prices skyrocketed with the invasion of Ukraine, after a large group of countries imposed economic sanctions on Russia. Prices have fluctuated somewhat in the recent term, but our measurements show clearly that the increases have reached Iceland.

In addition to the rise in fuel prices, we project that air transport prices will increase by 5.6% MoM (0.09% CPI effect). Airfares have proven difficult to measure in the recent past, however, and they fell unexpectedly by 10% in February. That said, they are likely to rise in the next several months, buoyed by increased demand and higher fuel prices.

Most other items are likely to rise between months. According to our measurements, clothing and footwear prices will increase by 5% (0.19% CPI effect) due to end-of-sale effects, after rising by only 3% in February, after the January sales. Food and beverages are set to rise in price by 0.7% (0.10%), and hotel and restaurant services by another 0.7% (0.03%).

Continued high inflation on the horizon

Many commodity prices have soared since the war in Ukraine began, and there are still lingering supply-chain bottlenecks due to the pandemic. All else being equal, higher commodity and energy prices will push the domestic price level sharply upwards, and imported inflation will probably rise further as well.

As the chart indicates, imported items do not yet weigh too heavily in twelve-month inflation, but this will probably change quite quickly. As our March measurements suggest, the effects will show first in petrol and food prices and then spread to airfares and other travel-related expenses. In the end, they will affect most imported subcomponents of the CPI. It is enormously uncertain, of course, how long-lasting the price hikes abroad will be and how much they could be offset by an appreciation of the ISK.

The housing component and imported goods are the main drivers of the rise in the CPI at the moment and will presumably remain so in the near future. The outlook is for inflation to remain high and not subside to any marked degree until next year. According to our preliminary forecast, the CPI will rise by 0.7% in April, 0.6% in May, and 0.5% in June. If these projections materialise, inflation will measure 7.3% in June.


Bergthora Baldursdottir




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