Seasonal rise in airfares a major driver of inflation

Airfares typically rise during the run-up to the Easter holidays. They climbed just over 3% MoM in March, and our measurements indicate that they will surge by 19.3% (0.41% CPI effect) in April. This alone explains about half of the increase in the CPI during the month. Petrol prices are set to ease by 0.3% between months (-0.01%). The price of Brent crude has fallen in the recent term, and we expect a continued slide in petrol prices in the months ahead.

Food and beverage prices rose in excess of forecasts in Q1. We expect a slightly smaller increase in April, or 0.54% (0.08%). Price measurements from the Icelandic Federation of Labour align well with our projection. A large share of food price inflation stems from domestic goods prices, which in part are pushed higher by cost hikes due to wage rises and higher electricity prices.

Imputed rent on familiar ground

Imputed rent is the second-strongest driver of the April rise in the CPI. The housing component has moved largely as expected in the past two months, with imputed rent rising by 0.43% in both February and March. We do not expect any major changes this month, and we therefore project an increase of 0.4% (0.08% CPI effect) in April. The more gradual increase in rent prices is due in part to a significant slowdown in population growth in the recent past. Imputed rent rose far more in April 2024, however, or by 1.68%, so if our forecast holds, its contribution to headline inflation will be far smaller this time. We estimate that the cost of housing, heating, and electricity combined will rise by 0.35% (0.10%) in April. Although imputed rent could still prove tricky to forecast, it has been considerably less volatile since the new calculation method was adopted last summer, as can be seen in the chart below.

Near-term inflation outlook

Twelve-month inflation measured 3.8% in March, dipping below the upper tolerance limit of the Central Bank’s (CBI) inflation target for the first time since year-end 2020. According to our forecast, it will measure 4.0% in April, thereby aligning with the upper limit. We then expect disinflation to resume in the months ahead, albeit at a reduced pace. Our preliminary forecast is as follows:

• May – CPI to rise 0.2% (twelve-month inflation 3.6%)
• June – CPI to rise 0.4% (twelve-month inflation 3.5%)
• July – CPI to rise 0.3% (twelve-month inflation 3.4%)

As before, if our forecast is to materialise, the ISK must hold relatively stable. It has appreciated somewhat in 2025 to date, so it would appear that the buying side of the FX market is reasonably satiated for the present. The CBI recently bought currency in the FX market in order to lean against further ISK appreciation, its first intervention in the market since February 2024. Furthermore, wage drift must be limited if our forecast is to materialise, but long-term wage agreements have eliminated significant uncertainty on that front.

Another inflation-related uncertainty has recently come to the fore. It hardly need be mentioned that inflation uncertainty has escalated severely in recent days because of the tariffs imposed by the US authorities last week. Our preliminary forecast for the months to come does not take into account the impact of a trade war, but once that situation grows clearer, we will adjust our inflation forecast if necessary. Our recent analysis of the tariff regime explores its potential impact on inflation.

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