Housing Costs and Airfares Are Major Contributors to the Increase

Housing costs are the second-largest contributor to the CPI increase this month. Indicators suggest tension in the housing and rental markets, as we recently discussed, and it appears that the situation will remain challenging in the coming quarters. We forecast that the housing component will rise by 0.65% (0.18% CPI effect), of which a 0.8% increase in imputed rent explains 0.15% of the CPI impact.

The largest part of the CPI increase is explained by the annual hike in airfares. Due to a fewer tourists this summer compared to the same time last year, airfare increases will be smaller than otherwise. We predict that the travel and transport component will rise by 1.4% (0.21% CPI effect), with a 9.8% increase in airfares (0.17% CPI effect) being the largest contributor. This reflects the trend in European airfares, which have been softer this summer than expected at the beginning of the year. It is also worth noting the fare hikes for bus services that took effect this month. According to our measurements, gasoline and diesel prices will remain unchanged from June after a decline.

Significant Summer Sales This Year

As usual at this time of year, summer sales are in full swing in many stores. This year, they seem to have a significant impact on lowering the CPI compared to recent years. Clothes and shoes are expected to decrease by 10.22% (-0.36% CPI effect), and furniture and household goods are expected to decrease by 1.5% (-0.08% CPI effect). Both subcomponents also fell in June, continuing the downward trend in July. This indicates cooling demand in the economy for items such as clothing, electronics, and household goods.

According to our forecast, food and beverage prices will rise by 0.3% (0.05% CPI effect), which is slightly less than in the last two months and the second smallest increase of the year if the forecast holds. Hotels and restaurants are expected to increase by 1% (0.05% CPI effect) due to a slowing tourism sector, which is slightly less than the same time last year as current offers at hotels and restaurants play a role. Additionally, recreation and culture are expected to rise by 0.5% (0.05% CPI effect).

Inflation Outlook for the Coming Quarters

The road to the inflation target has been bumpy in the first half of the year, mainly due to the impact of seismic activity on the housing market in recent months. These effects seem to have mostly manifested by now. However, volcanic and seismic activity on the Reykjanes Peninsula is likely far from over. There remains a risk that infrastructure and properties could suffer significant damage beyond Grindavík. This could, for instance, impact energy supply and negatively affect the development of tourism and other industries in the southwest in the coming quarters.

According to our short-term forecast, there are prospects for faster disinflation in the autumn months. We expect a 0.3% increase in the CPI in August, a 0.2% increase in September, and a 0.3% increase in October. If the forecast holds, the annual headline inflation rate will be 5.8% in August, 5.7% in September, and 5.4% in October.

There are, however, many uncertainties. For our forecast to hold, wage drift needs to be limited, and the krona's exchange rate must remain stable. As before, global unrest is also a major uncertainty factor; escalation in that area could have significant negative effects on international trade, commodity prices, and prices here and abroad, causing disruptions in supply chains. In the latter half of the year, many fixed-rate periods for non-indexed mortgages will end. As most of these fixed-rate periods end by mid-2025, the impact of high interest rates on households and businesses could become much stronger in a relatively short time, reducing consumption and investment more than forecasted.