Inflation outpaces expectations

Inflation turned out higher than expected in June, largely due to an uptick in real estate prices. According to figures just released by Statistics Iceland (SI), the consumer price index (CPI) rose 0.62% month-on-month in June, raising twelve-month inflation to 2.6% from 2.0% in May. The CPI excluding housing was up 0.46% in June and has risen by 1.1% in the past twelve months.

 The June CPI measurement exceeded all published forecasts. We had projected a rise of 0.3% between months, whereas forecasts as a whole lay in the 0.3-0.4% range. The difference between our forecast and SI’s actual figures lies mainly in a 1.1% jump in imputed rent (CPI effect 0.23%), which is largely a reflection of house prices. Food and beverages rose in price as well, by 0.39% (0.04%), but we had expected this.



Housing component pushes upwards

The housing component was the main driver of this month’s rise in the CPI. The component as a whole rose by 0.84% (0.29% CPI effect), and paid rent rose by about 0.56% (0.02%). But the bulk of the increase lay in a 1.08% rise in imputed rent (0.23% CPI effect), which, as is stated above, is based mainly on house prices.

SI’s house price subcomponents illustrate developments by property type and location. Detached housing in the greater Reykjavík area rose by 1.7% MoM and condominium prices by about 0.6%. But prices in regional Iceland led the way, rising by 2.3% MoM and 14.4% over the past twelve months. On the other hand, SI figures show that house prices nationwide have risen 8% in the past twelve months, quite a bit below the May 2017 peak of 24%.

House prices were not the only item to increase in June, however, as the CPI excluding housing rose by 0.46% MoM. Other upward-pushing items were petrol, which rose 2.81% (0.09% CPI effect), and air transit, which rose 13.96% (0.19%).

Hotel and restaurant services rose in price as well, by 0.89% (0.05%), and food and beverages by 0.36% (0.04%).

Few items declined in June, apart from housewares, which fell by 1.37% (-0.05%).


Near-term outlook

We forecast a 0.2% decline in the CPI in July, a 0.5% rise in August, and a 0.4% rise in September, which will leave headline inflation at 2.8% in September, above the Central Bank’s (CBI) inflation target.