Imported goods as a whole rose in price by 0.44% in April, the smallest MoM increase (excluding seasonal sales) since mid-2018. Imported goods prices have risen by just under 3% since the middle of 2018. This modest increase — a pleasant surprise, given the above-mentioned depreciation — is probably due in large part to stiffening competition in the retail market and growing uncertainty about consumer demand in coming months.
At present, imported inflation accounts for just over 1% of the current inflation level of 3.3%. The housing component accounts for another 1%, and domestic goods and services explain 0.5% and 0.6%, respectively. Thus it can be said, with some simplification, that imported inflation, housing, and domestic goods and services each account for about a third of inflation at present.
Inflation outlook improving
Although inflation rose somewhat in April, we think the outlook for coming quarters is improving. We expect the CPI to rise by 0.2% in May and 0.4% in June, and to remain virtually unchanged in July, leaving headline inflation at 3.3% in July.
Airfares can be expected to rise strongly as summer takes hold, owing to rising fuel prices, peak season demand, and reduced competition after the fall of WOW. Imported inflation stemming from rising goods prices should continue to taper off as the summer approaches, assuming that the ISK holds its ground. We also expect house prices to rise at roughly the current pace in coming months.
Inflation could start to ease in the latter half of the year, however. The newly landed wage agreements appear likely to cause less short-term inflationary pressure than we had feared. Furthermore, the ISK is reasonably likely to hold broadly stable despite the prospect of weaker export revenues. And finally, house price inflation will probably ease over time, and reduced demand pressures should result in smaller domestic price hikes overall. Rising wage costs will probably cause some inflationary pressures in the foreseeable future, though — pressures that could escalate further ahead.