Partial end-of-sale effects

This year’s winter sales had a rather more tepid impact in January than we had expected. The price of clothing and footwear prices fell by 6.9%, furniture and housewares by 4.6%, and electrical equipment by 9.5%. As a result, this month’s end-of-sale effects will be milder, if our forecast holds. We project that clothing and footwear prices will rise 4.8% (0.17% CPI effect) and furniture and housewares prices by 4.9% (0.27% CPI effect).

Other key items that are forecast to rise include food and beverages, which will increase in price by 0.46% (0.07%). Indicators such as the Icelandic Federation of Labour’s grocery price index, which rose 0.22% in February, suggest that food prices will inch upwards. In addition, we project that imputed rent will increase by 0.45% (0.09%) during the month, after a highly unexpected decline in January. Most indicators imply that the rental market is cooling at present, although it is probably too early to draw strong conclusions on that front. We expect marginal increases in imputed rent in coming months. We estimate that the cost of housing, heating, and electricity combined will rise by 0.4% (0.11%). According to our forecast, other housing services, also called “other services relating to the dwelling” will have only a negligible upward impact on the CPI and will play a major role in this month’s disinflation, as this item increased by an unusually large amount in February 2024 and will now drop out of the twelve-month measurement.

Airfares and petrol prices rise

The main reason for the hefty drop in the CPI in January was the unusually large decline in airfares. Because that drop was so unexpectedly large, we expect it to reverse to a degree and to have a stronger impact than previously anticipated. According to our forecast, international airfares will rise by 5% (0.09%). Fuel, another subcomponent of travel and transport, will increase as well, by 0.7% (0.03%).

The inflation outlook

Our preliminary forecast is as follows:

• March – CPI to rise 0.4% (twelve-month inflation 3.8%)
• April – CPI to rise 0.5% (twelve-month inflation 3.7%)
• May – CPI to rise 0.3% (twelve-month inflation 3.4%)

In sum, we expect twelve-month inflation to fall below the CBI’s 4% upper threshold, to 3.8%, as soon as next month. On the other hand, there is some uncertainty about developments in the wage negotiations between the teachers and the State, and about their impact on the labour market further ahead. Another significant uncertainty centres on the possibility of a tariff-driven trade war, which could have a widespread effect on world trade and global price movements.

In order for our forecast to materialise, wage drift must be limited and the ISK exchange rate relatively stable. As is noted above, these factors are uncertain, particularly the ones that relate to the labour market. The last lap on the way to the inflation target could prove to be littered with hurdles in the form of wage drift, higher import prices, and the adverse effects of a trade war.

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