We project that the consumer price index (CPI) will remain unchanged month-on-month in January, nudging twelve-month inflation upwards to 4.9%. Hikes in public levies will take effect, as is customary in January, while seasonal sales and reduced airfares will pull strongly in the opposite direction. Statistics Iceland (SI) will publish the CPI for the month on 30 January.
Inflation forecast: We expect a slight uptick in January
According to our forecast, twelve-month inflation will rise marginally in January, after having held steady in December. As is typically the case in January, seasonal price changes will tend to offset one another during the month. We expect headline inflation to fall below the upper deviation threshold of the Central Bank’s (CBI) inflation target in March.
Petrol prices up, airfares down
The travel and transport component of the CPI is set to rise by 0.5% (0.08% CPI effect) in January, according to our forecast. Our measurements indicate that higher carbon taxes on fuels will push the price of petrol and diesel upwards by 3.4% (0.11% CPI effect). Most other items falling under the travel and transport component will rise as well, apart from airfares. Chief among the upward-pushing items are bicycles, owing to the year-end expiry of VSK concessions on the purchase of electric and hydrogen-powered motorcycles, motor scooters, and bicycles, as well as conventional bikes and e-scooters. According to our measurements, this will push the CPI upwards by 0.09% in January.
The annual drop in airfares will also show during the month. Our measurements indicate that airfares will fall 9.9% (-0.2%), after rising 7.92% (0.15%) in December. In general, airfares follow a reasonably predictable seasonal pattern, rising in response to the Christmastime spike in demand and then falling again in January as demand settles down.
Winter sales pull sharply downwards
Post-holiday sales usually make their mark on the January CPI measurement. Our forecast suggests that clothing and footwear prices will fall by 10.3% (-0.39%) during the month, thereby having the strongest downward impact of any CPI component. Second in line are furniture and housewares prices, which we expect to fall by 4.6% (-0.26%).
Smaller hikes in food and beverage prices, but the battle isn’t won yet
We project that food and beverage prices will rise 0.3% in January. Our estimate is based mainly on the 0.3% increase in the Icelandic Federation of Labour’s groceries index, which correlates closely with SI’s measurements. This is a somewhat smaller increase than was widely expected at the turn of the year, considering the recent media coverage of upcoming price hikes. In large part, we attribute this comparatively favourable projection to the strengthening of the ISK in the final four months of 2024, offsetting input price hikes and domestic cost increases.
Imputed rent keeps its recent pace, while other housing-related subcomponents push steeply upwards
We project that imputed rent will rise by 0.6% in January (0.12% CPI effect), which is close to its monthly average increase of 0.61% since the new calculation method was adopted last June. Imputed rent therefore accounts for about half of this month’s increase in the housing component. The combined price of housing, heating, and electricity is set to rise by 0.8% (0.24%). Other housing-related costs therefore make an unusually large contribution, mainly the increase in electricity prices. Also worth mentioning is the increase in contributions to National Catastrophe Insurance (NTÍ), which will push property insurance prices upwards, although they do not fall under the housing component. We estimate that the rise in NTÍ contributions will raise the CPI by 0.12% in January.
Inflation movements in the new year
We are fairly optimistic that twelve-month inflation will continue to fall in 2025, and we expect a fairly brisk decline from February onwards, although occasional breaks in the downward pattern cannot be ruled out. Our preliminary forecast is as follows:
- February – CPI to rise 0.7% (twelve-month inflation 4.3%)
- March – CPI to rise 0.4% (twelve-month inflation 3.8%)
- April – CPI to rise 0.5% (twelve-month inflation 3.8%)
In order for our forecast to materialise, wage drift must be limited and the ISK exchange rate relatively stable. Another uncertainty centres on wage agreements for the public sector workers whose contracts are still pending. Furthermore, geopolitical uncertainties abound, with wars and political unrest plus harvest failures in the agriculture sector.
Analyst
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