We project that the consumer price index (CPI) will fall 0.1% in November, lowering headline inflation to 4.5% if our forecast materialises. Sale days advertised by various retailers have a downward impact, as do lower airfares and declining housing costs. On the flip side are higher prices for foods and beverages. The outlook is for a slightly smaller change in twelve-month inflation in December and January. February could mark a turning point, though, as we expect inflation to fall below the upper deviation threshold of the Central Bank’s (CBI) inflation target for the first time since the beginning of 2021. Statistics Iceland (SI) is scheduled to publish its November CPI measurement on 28 November.
Inflation forecast: CPI set to fall in November
Inflation has tumbled this autumn and is likely to fall further over the winter. We project that the CPI will decline in November. Special sale days, lower airfares, and housing costs all push the index downwards, while higher food prices push upwards.
Big-bargain sales and lower airfares have the strongest downward effect on the CPI
One-day super-sale events modelled on those held abroad occur during the data collection week this year. Special deals and discounts marking Singles’ Day (11/11) have been seen widely in retail stores, some of them stretching into this week. According to our forecast, these discounts will mainly affect clothing and footwear prices, although we think special sale days will somewhat affect price measurements for electronic equipment, furniture, and housewares as well. We expect clothing and footwear prices to fall by 3.4% (-0.12% CPI effect) and furniture and housewares prices by 0.2% (-0.04%).
Airfares look set to fall by 4.6% (-0.08%) in November, after rising somewhat in the month beforehand. This is in keeping with the typical pattern, which features a drop in November and a rebound in December. Another sub-index under the transport component – fuels and lubricants – will decline as well, according to our measurements. We project that petrol prices will fall 0.8% (-0.03%) in November, partly in response to the past few days’ developments in global oil prices.
Imputed rent to fall for the first time in over a year
Tension in the real estate market appears to be easing. According to recent figures from the Housing and Construction Authority (HMS), the house price index fell in September, its first drop since January. The rent price index also fell in September, for the second month running. Our forecast suggests that declining housing costs will show clearly in the November inflation measurement. We project that imputed rent will fall by 0.2% month-on-month (-0.04% CPI effect). In November 2023 it rose by 2.1%, pushing the CPI upwards by 0.4%; therefore, the lion’s share of this month’s projected drop in twelve-month inflation stems from the turnaround in the housing market. In all, the CPI rose by 0.4% in November 2023, but that month will now drop out of the twelve-month inflation measurement, which explains the plunge we expect to see in headline inflation.
Higher food and beverage prices the main upward driver
After declining in August and September, food prices rose once more in October. We expect another increase in November, but only half as large as last month’s. According to our forecast, food and beverage prices will rise by 0.5% in November (0.07% CPI effect), thereby making the largest upward contribution to the CPI during the month. Some price hikes stem from difficulties with harvests of various food crops in the recent term.
Continuing disinflation ahead
We expect twelve-month inflation to rise marginally in December and then fall fairly swiftly in Q1/2025. Our preliminary forecast is as follows:
- December – CPI to rise 0.5% (twelve-month inflation 4.6%)
- January – CPI to fall by 0.2% (twelve-month inflation 4.6%)
- February – CPI to rise 0.5% (twelve-month inflation 3.7%)
This shift is due, among other things, to favourable price movements in trading partner countries, a cooling housing market, and a slowdown in wage growth. In order for this to materialise, the effects of domestic politics and international affairs – both of which could change the picture markedly in coming months – must be limited. As always, there are various other uncertainties as well. Chief among them this time is uncertainty about wage contracts for the segments of the public sector that have yet to finalise new agreements.
Analyst
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