A strong impact from lower airfares will offset end-of-sale effects

The strongest effect in either direction will come from a sizeable drop in airfares, according to our measurements. Airfares rose far more than was anticipated in July, and the annual August decline will presumably be larger as a result. We forecast a 9.6% fall in airfares (-0.17% CPI effect). Fuels, another subcomponent of the travel/shipping component, will fall by 0.6% (-0.02% CPI effect), as our measurements indicate that both petrol and diesel fuel will fall in price by 0.6% during the month. These two subcomponents combined – airfares and fuels – will lower the travel/shipping component by 1.5% (-0.23%).

 Summer sales were shallower in July than we had anticipated, and we expect end-of-sale effects in August to be correspondingly modest. According to our forecast, clothing and footwear will rise in price by 4.7% MoM (0.17% CPI effect) and furniture and housewares prices by 0.7% (0.04%).

Other upward-pushing components

Apart from the expected annual price movements, the housing component will be the main driver of the increase in the CPI in August. We forecast that imputed rent will rise by 0.5% (0.10%). Developments in imputed rent since the new calculation method was introduced this June have been interesting in many respects. First of all, the initial position proved much more favourable than was expected by many, ourselves included. For example, a survey conducted by the CBI showed that market agents expected the methodology change to cause inflation to measure higher than it would have otherwise. According to our calculations, inflation would actually be higher if the old method were still in use, but the long-term effect of the change is still unknown. Second, imputed rent has been more inelastic than it was previously. This suggests that as we had envisioned, the new method results in less volatile measurements. We project that the average MoM rise in imputed rent will hover around 0.5% for the next several months. Furthermore, a more tepid year for tourism could lift some of the pressure off the rental and housing markets over time.

We expect the August rise in food and beverage prices to be modest compared to July, when we saw a surge of 1.1% MoM (0.15% CPI effect). According to our forecast, food and beverages to rise in price by 0.5% (0.07%) this month. Among other items that we expect to increase are recreation and culture, up 0.4% (0.04%) and hotel and restaurant services, up 0.7% (0.04%).

The near-term outlook

Because the CPI did not rise dramatically from month to month in August and September 2023, twelve-month inflation will hold broadly unchanged in the same months of 2024. The CPI rose more strongly last October, however, and we therefore anticipate a larger decline in headline inflation this coming October. Our preliminary forecast is as follows:

• September – CPI to rise 0.2% (twelve-month inflation 6.1%)
• October – CPI to rise 0.2% (twelve-month inflation 5.6%)
• November – CPI to rise 0.3% (twelve-month inflation 5.5%)

There are several uncertainties to consider, chief among them the ISK exchange rate, as our forecast depends on its remaining relatively stable. The ISK has weakened a bit in the recent term, however, and if the trend continues, it could push the price of imported consumer goods higher than we anticipate. Furthermore, it is uncertain what impact the upcoming year-end 2024 change in taxes on motor vehicle operation will have on SI’s index measurements and, by extension, on measured inflation in 2025.

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