Housing market slowing down … fast!

The turnaround in the housing market has begun, and house price inflation is finally slowing down – and at a rapid pace, if one can say something is slowing fast. House prices fell by a smidgen last month (-0.01%), albeit offset by the interest component. Imputed rent is based on these two items, and the outcome for September was therefore a MoM increase of 0.05%, the smallest since November 2020, when it actually fell marginally.

We expect this trend to continue, with imputed rent inching downwards by 0.15% (-0.03% CPI effect) in October. On the other hand, paid rent is set to rise by 0.5% (0.02%). The housing component will therefore remain flat in October, according to our forecast.

Airfares the main inflationary item in October

The main upward-pushing item in October is the travel and transit component, which will rise by 0.8% (0.12% CPI effect), according to our forecast. The main determinant within the component is air travel and transit, which is set to increase by 2.8% (0.07%), after falling 17% last month. Fuel prices will rise as well, according to our forecast, by 1.2% (0.05%), after having fallen nearly 6% over the past two months.

Other key items that are likely to rise MoM are food and beverages, by 0.2% (0.03% CPI effect), and recreation and culture, by 0.3% (0.03%).

Inflation to fall swiftly in the near term, but it’s a long way down

A year has now passed since the CPI began its aggressive month-by-month climb. We are probably embarking on a period in which months with hefty rises will drop out of twelve-month measurements and be replaced by months with more moderate ones. This will cause headline inflation to fall markedly in the near term. According to our preliminary forecast, the CPI will rise by 0.1% in November and 0.3% in December, and then fall by 0.3% in January. If our forecast materialises, inflation will measure 7.6% in January and average 8.1% for 2022 as a whole.

It is safe to say that although inflation will fall quickly according to our forecast, it has a long road to cover before it realigns with the Central Bank’s (CBI) 2.5% inflation target. The outlook is for a mellower housing market, which will do much to defuse inflation in the coming term. According to our long-term forecast, inflation will average 5.4% in 2023,and 3.6% in 2024.

The main assumptions underlying our forecast are a calm housing market, a slowdown in imported inflation, and an ISK appreciation strong enough to contain import prices. Another uncertainty is the upcoming round of wage negotiations, although our forecast incorporates the assumption that wages will rise markedly, particularly in 2023.

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