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We project headline inflation at 8% in November

Inflation has fluctuated in a narrow range in recent months, and we forecast that it will keep doing so for the rest of the year. We then expect it to fall more rapidly in H1/2024. Higher house prices and a weaker ISK are the main reasons inflation has been more persistent than previously forecast.

We project that the consumer price index (CPI) will rise by 0.6% month-on-month in November, nudging twelve-month inflation upwards to 8.0%. The main upward-pushing item in November is house prices, whereas airfares are set to decline month-on-month. The weakening of the ISK affects imported goods prices, but the impact will probably be stronger in coming months if the depreciation does not reverse.

We are still of the opinion that inflation will hold broadly steady in coming months and then start to fall rather quickly in early 2024. Owing to the continued rise continued house prices and the weaker ISK, we now expect inflation to be higher in coming months than we had previously envisioned. Statistics Iceland (SI) will publish the CPI for the month on 29 November.

The housing market has certainly not hit absolute zero

The main driver of inflation this month, according to our forecast, is imputed rent. We expect it to rise by 2.0% (0.38% CPI effect), with market prices rising 1.5% and the interest component by 0.5%.

The housing market is considerably calmer than it was a year ago, as the chart shows, and twelve-month house price inflation is currently just over 3%. That said, prices have risen somewhat in the past two months – especially in October. We expect them to rise by a similar amount in November.

In coming months, we project that house prices will keep rising, albeit at a slower pace than we have forecast for November. It has proven difficult to forecast house price movements recently, and the market has been quite erratic since it started to cool last autumn. If it starts to take off more strongly than we forecast here, inflation will be more persistent, but conversely, if the housing market calms down more, inflation will do likewise.

Food prices on the rise

Apart from the housing component, the food and beverages component is the main driver of inflation in November, rising by 0.5% (0.08% CPI effect), according to our forecast. Exchange rate developments generally affect the price of food and beverages, and it just so happens that the ISK has weakened this autumn. In terms of the trade-weighted exchange rate index, it has depreciated by just over 7% since the beginning of September, and by around 3% in November alone. If the trend does not reverse in the near future, the price of food and other imported goods will rise in the next few months.

Other key items set to rise between months are recreation and culture, by 0.5% (0.05% CPI effect), and furniture and housewares, by 0.7% (0.04%).

Airfares and petrol prices set to fall

The strongest downward-pushing CPI component for November is travel and transit. Airfares are positioned to fall by a full 11% (-0.23%), in keeping with the typical pattern, which features a drop in November and a rebound in December. We also expect fuel prices to decline by 0.25% (-0.01%). The global price of Brent crude has fallen rather quickly in the recent term, more than offsetting the ISK depreciation.

Near-term inflation outlook

Twelve-month inflation has fluctuated in a narrow range since mid-year. It eased slightly between September and October, to 7.9%. As is noted above, we expect it to maintain this pattern over the next several months and then fall more quickly in H1/2024. According to our preliminary forecast, the CPI will rise 0.8% in December, 0.4% in January, and 0.8% in February. If this forecast is borne out, twelve-month inflation will measure 7.1% in February. This is a higher inflation rate than previously assumed, owing mainly to a stronger-than-expected increase in house prices.

 Inflation will fall more rapidly in H1/2024, though, when large rises from the first half of this year drop out of the twelve-month CPI measurement. According to our long-term forecast, inflation will average 6.1% in 2024 and 3.9% in 2025.

The situation is still highly uncertain, though. In the short run, house prices are the main uncertainty, plus the ISK exchange rate. In the long term, the big question mark centres on wage agreements, which are set to expire one after another in early 2024. Given how tight the labour market is, we forecast hefty pay rises of 8% in 2024 and 6% in 2025. If wage rises are more moderate than we anticipate, however, inflation will fall faster over the forecast horizon.


Bergthora Baldursdottir




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