Housing component still the main cause of increase and Easter rise in airfares extends into April

The housing component weighs most heavily on the increase, rising by 1.21% (0.35% effect on CPI) between months. Imputed rent, which is largely based on market prices for residential housing, increased by 1.67% (0.32% effect on CPI). We had forecasted a 1.3% increase (0.25% effect on CPI). Airfares rose by 10.45% (0.20% effect on CPI), which is more than the 7% (0.12% effect on CPI) our forecast anticipated. This is a seasonal rise in airfares that typically occurs over Easter, but this year Easter was early, so the effects were spread over March and April.

 Recent rises in residential house prices that have been reflected in the Housing and Construction Authority's measurements are also mirrored in the Statistics Iceland calculation of imputed rent. Of the aforementioned 1.7% monthly increase, 1.2% is due to a rise in measured house prices, and 0.5% is due to the interest component. As in the previous month, the increase in house prices between measurements was much higher outside the capital area (2.1%) than in the capital area where multi-family housing increased by 0.9% and single-family dwellings by 0.6% month-on-month. There are undoubtedly effects of the demand from Grindavík residents for housing in neighboring communities. The twelve-month increase in residential house prices now measures 6.4%, but it went as low as just under 2% last August following a large increase in the preceding quarters.

Effects of sale endings diminish and cars continue to fall

It is noteworthy that clothing and shoe prices decreased by 0.44% (-0.02% effect on CPI) after rising the past two months. This could be interpreted as the effects of the end-of-sale period fully manifesting. It is also interesting that the vehicle purchase category fell by 0.41% (-0.03% effect on CPI). Demand for new cars has greatly decreased in the first few months of the year compared to the same period last year, which has undoubtedly had an effect.

Prices of various other imported goods also fell month-on-month, ranging from imported food to furniture. This could indicate that easing inflation abroad, along with intensifying competition and an expected slower rise in labor costs in the coming years in commerce after recent wage agreements, are starting to break through in the price development of imported goods.

Underlying inflation eases

Underlying inflation is lowering across all measures, which must be considered good news. The Central Bank significantly considers underlying inflation in the lead-up to interest rate decisions as it excludes various volatile items. Certainly, though, inflation is still substantial by all measures, even though the inflationary pressure seems to be generally easing.

Outlook

The reason for the significant easing of annual inflation in April is partly how large an increase April last year was in the CPI, but that month now drops out of the twelve-month measurement. In the coming months, the increase months that drop out of the annual inflation measurement will not be as large, which will result in a slower pace of disinflation by this measure. According to our preliminary forecast, we expect:

• May - 0.3% increase in CPI (annual inflation 5.9%)
• June - 0.5% increase in CPI (annual inflation 5.5%)
• July - 0.2% increase in CPI (annual inflation 5.7%)

The main uncertainties in the coming months include, among other things, the effects of a changed methodology in the calculation of imputed rent and price development in the housing market.

The impact of Grindavík residents' housing purchases is showing on the housing market as house prices in Suðurnes have risen significantly recently. Real estate prices in the capital area also seem to have picked up recently. It will also soon become apparent what this year's summer will look like in tourism. Starting in June, Statistics Iceland will stop looking at market prices and indexed interest rates when calculating imputed rent and instead base it on data about actual rent prices. Probably, the change will significantly reduce monthly fluctuations in this category, but whether the change will result in inflation easing slower or faster than otherwise depends on the supply and demand in the rental market.

We believe, though, that there are good chances that inflation will continue to ease throughout the year, although this easing will be much slower than we have seen over the past year or so. Inflation could measure around 5% by the end of the year, thereby being half as much as it was at its highest just over a year ago.