It therefore matters greatly which goods are in the basket and which ones fall in price. Cutting the price of goods that are rarely included in households’ grocery baskets has little impact on food prices overall, but a rise in the price of staples such as grains, meat, and dairy products will have a much stronger effect. Timing is important as well: a special offer that is not ongoing while SI is measuring prices will not be included in the measurement for that month, and by the same token, price changes made after the price collection period ends will not show until the following month.

The number of price cuts does not tell the whole story

After Iceland’s largest grocery stores announced price cuts and price freezes at the end of September, many observers expected an overall drop in prices. That did not happen, however. According to the Icelandic Federation of Labour, the grocery price index rose by just over 0.4% between September and October, its largest jump since March, and prices rose in most stores. SI’s measurement revealed the same pattern, resulting in the aforementioned 0.4% increase in the food component.

Furthermore, a price freeze is not a price cut. An item that costs the same in October as in September will not cause prices to change in either direction. In order for the food component to fall, price reductions must outweigh price increases for other products, and this did not happen in October. The number of price cuts says little in and of itself. What matters is how large a price change is, what goods it affects, and whether the reduction is permanent or temporary.

A lower grocery bill does not necessarily lower the index

Despite all of this, price cuts can be important to households. Those who can choose less expensive products – other brands, for instance, or products that are on sale – can end up paying less for food each month. For these households, then, their grocery bill can indeed decline.

But this does not automatically affect the index. The CPI is intended to measure changes in the price level, not the savings that can take place when households shift to different brands or choose cheaper products. If households buy cheaper brands than they did previously, their food bill may fall, but that change need not have a downward effect on the index. Nevertheless, a change in households’ consumption patterns can affect the index to some degree when index weights are revised once a year.

Domestic goods keep prices higher

Closer scrutiny of food subcomponents reveals a distinct pattern. In the past twelve months, the price of fish has risen the most (13.7%), but the price of fruit (5.8%), meat (5.0%), and dairy products (4.7%) has also risen considerably more than the food component as a whole (3.9%). The items listed above are primarily domestic, apart from fruit. A similar pattern can be seen in recent months, with the exception that fruit prices have fallen. In the past two months, the price of fish, vegetables, meat, and dairy products has risen more than the food component as a whole, which increased by 0.7%, as the chart below illustrates. Meat prices rose 1.5% and dairy products by 1.2%. Both of these weigh heavily in the grocery basket. The price of various other goods – grains, for instance – has either held steady or fallen, however.

A strong ISK has probably created the scope to lower the price of various imported goods, and the price of fruit, most of which is imported, has fallen by 0.6% in the past two months. In the case of domestic agricultural products, however, there is less flexibility, as wholesale dairy prices and prices paid to farmers are determined outside grocery stores. For example, the agricultural product pricing committee hiked wholesale milk and dairy product prices by 1.4% in September, the third increase of the year.

Wage costs are an important factor as well. Both domestic food production and retail sales are labour-intensive sectors. SI’s wage index has risen by 5.6% in the past twelve months, far more than the increase in food prices over the same period. In our assessment, wage costs continue to play a role in maintaining price pressures in the food market.

Price hikes are slowing

Food price increases have subsided over the course of 2026. In the first three months of the year, the food component of the CPI rose month-on-month by 1.0%, 0.9%, and 0.7%, respectively. In the spring and summer, however, price hikes slowed markedly, and in fact, the food component held virtually flat from March to July. Furthermore, the twelve-month increase subsided from 5.8% in March to 3.9% by October. Price hikes have gathered this autumn, however, and the food component has risen by 0.3-0.4% per month since August. It therefore rose in October in spite of grocery stores’ price cuts and price freezes, although it is possible that these price control measures forestalled further rises. It is too early, however, to assess the impact of these measures based on a single month’s measurement.

As we see it, price freezes could keep food price hikes in check through the year-end. The Icelandic Federation of Labour’s most recent measurement points in this direction, as it indicates that prices were virtually unchanged in November. Nevertheless, the food component is unlikely to decline materially, as there are continued price pressures on a range of goods that weigh heavily in the grocery basket. Furthermore, price freezes tend to delay price hikes rather than preventing them, and when the price freezes expire, some of the accumulated cost could show in the price level at the start of next year.

The big picture, however, is that price pressures are easing. The economy is cooling, and we expect slower price hikes to show in more parts of the CPI in the near future. Even so, we expect inflation to remain stubborn and to remain above the Central Bank’s 2.5% target in the coming term. In our most recent macroeconomic forecast, we project average inflation at 4.5% in 2027 and 3.6% in 2028.