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Our forecast: inflation to measure 9.3% in July

The outlook is for a 0.6% month-on-month rise in the CPI, bumping headline inflation up to 9.3% in July, if our forecast materialises. Summer sales will offset higher house prices, airfares, and food prices.

We project that the consumer price index (CPI) will rise by 0.6% MoM in July and that twelve-month inflation will measure 9.3%, up from 8.8% in June. This would be Iceland’s highest inflation measurement since October 2009. In keeping with the recent pattern, house prices and imported inflation are the main drivers of this month’s increase, with summer sales pulling in the opposite direction. We expect inflation to peak in late summer and then begin falling slowly and steadily. Statistics Iceland (SI) will publish the CPI for the month on 22 July.

When will house price inflation ease?

Rising house prices have strongly affected the CPI in the recent term. The imputed rent subcomponent of the index rose by 2.9% in June, the largest single-month increase since September 2016. We expect it to rise by another 2.2% month-on-month in July (0.42% CPI effect). Statistics Iceland (SI) calculates a three-month moving average, with the July measurement capturing price movements in April, May, and June. We therefore project that June will be calmer than the two months beforehand. Hopefully, it is a sign of a slowdown in house price inflation.

Summer sales offset imported inflation

In many stores, summer sales are in full swing by now, pushing the CPI temporarily downwards. According to our forecast, the clothing and footwear component will be the main downward-pushing item this month, falling by 6.9% MoM and lowering the CPI by 0.24%. Furniture and housewares prices will also be affected by summer sales, falling 0.9% in July (-0.06% CPI effect).

But these two go only so far in offsetting other increases. Apart from housing, we expect the travel and transport component to weigh heaviest in this month’s rise, pushing the CPI upwards by 2.2% MoM (0.34% CPI effect). Much of this is due to airfares, which generally rise in July. For this month, we project an increase of 14% (0.30% CPI effect).

Furthermore, we expect petrol prices to rise by 2% (0.7%) MoM. According to SI measurements, fuel prices are up 26.5% year-to-date, owing to steep increases in global fossil fuel prices. Nevertheless, the price per barrel of Brent crude has begun to fall again, although our measurements indicate that the decline has not yet affected prices in Iceland.

Other key items set to rise in price MoM are food and beverages, up 0.5% (0.08% CPI effect) and hotel and restaurant services, up 0.9% (0.04%).

High inflation still in the cards, but the outlook has improved

As is noted above, domestic inflation is now at its highest since October 2009. At present, as in the recent past, the housing component and imported goods are the main drivers of the trend. Of the 8.8% headline inflation figure for June, 3.6% stems from housing, 2.4% from imported goods, 1.6% from domestic services, and 1.2% from domestic goods.

According to our short-term forecast, both house prices and imported inflation will keep rising. We expect the CPI to increase by 0.6% in August, 0.4% in September, and 0.5% in October. If these projections materialise, inflation will measure 9.3% in October.

But sunnier times may lay ahead. Foreign commodity prices, for instance, have fallen considerably on average in the past few weeks. If this trend continues, we could see a marked slowdown in foreign price hikes – and weaker imported inflation. We think it most likely, though, that imported inflation will continue to rise in coming months, albeit at a slower pace than before. If price reductions abroad pass through quickly to Iceland, inflation will presumably be lower in the next few months than we have forecast here.

By the same token, house price inflation could lose momentum quickly in the near future. In fact, our long-term forecast is based to a fair degree on the assumption that house prices will fall over the course of the autumn. According to our long-term forecast, inflation will average 8.2% in 2022, 6.5% in 2023, and 4.1% in 2024. Another important assumption – and one of the key uncertainties in our long-term forecast – is that the wage negotiations set for late this year will not result in excessive pay rises.


Bergþóra Baldursdóttir