Higher prices for drugs and medical products will also push the index upwards. This segment of the health component rose by 2.3% in April, and we expect another 2.3% increase this month (0.04% CPI effect). The increase is presumably driven by the usual suspects: exchange rate pass-through from the depreciation of the ISK, coupled with a pandemic-fuelled boom in global demand for drugs and medical goods and rising transport costs.
Is COVID-19 starting to affect the housing market?
According to our measurements, the housing component will increase by 0.3% (0.10%) this month. The main upward-pushing item is repair and maintenance, which we expect to rise by 2.4% (0.12%), mainly because of an increase in the labour component in the building cost index, stemming from an increase in living standards agreements during the month. Imputed rent, which for the most part reflects developments in house prices, is set to fall by 0.20% (-0.03% CPI effect), according to our measurements. This component has already fallen by nearly 2% in the past three months.
Statistics Iceland’s measurements for this month are based on purchase agreements finalised in February, March, and April, and our own measurements indicate clearly that the COVID-19 pandemic has begun to show in the data. In our recent macroeconomic forecast, we projected that real house prices will fall in the next two years – by over 3% this year and by 2.4% in 2021 – due to the impact of COVID-19 on the economic outlook.
Petrol prices continue to fall
According to our forecast, the travel and transport component will fall by 0.6% MoM (-0.09% CPI effect). The main contributor here is fuel prices, which we expect to fall by 3.4% (-0.11% CPI effect). Crude oil prices have plummeted recently, although in Iceland the impact is muted somewhat by the ISK depreciation. In the past three months, the component has already fallen by over 9%.
We expect a 3.6% drop in airfares (0.06% CPI effect), although the sparsity of flight offerings makes forecasting difficult at the moment. The situation could change in the next few months, however, as the border is set to open in June, and it will probably become easier to measure developments.
Inflation moderate in the coming term
The inflation outlook for the next few months is reasonably favourable. We expect the CPI to rise by 0.3% in June, then fall by 0.2% in July, and rise again by 0.2% in August. If our forecast materialises, inflation will remain below the target, measuring 2.1% in August.