Imported inflation loses steam

The main upward-pushing item this month was the clothing and footwear component, which increased 4.3% (0.14% CPI effect), owing to the end-of-sale effects that commonly surface in March. Food and beverage prices rose 0.7% MoM (0.11% CPI effect), somewhat less than we had expected – and hopefully a sign of things to come. In 2023 to date, the food and beverage component has risen by nearly 4%, and in the next several months we expect grocery prices to climb much more slowly, owing to a stronger ISK and better balanced prices abroad.

The travel and transport component rose by 0.6% (0.10% CPI effect), with petrol prices falling 0.7% (-0.03%) and airfares rising 4.5% (0.09%). Airfares rose less than we had projected, and we therefore expect them to move higher in April. Other upward-pushing items included hotel and restaurant services, up 1.4% (0.07%), and other goods and services, up 0.9% (0.07%).

Imputed rent still climbing

The market price of housing rose by 0.1% MoM in March, after falling during the three months beforehand. Condominium prices in greater Reykjavík rose 0.3% between months, while single-family home prices in the capital area and house prices in regional Iceland fell by 0.2%. The interest subcomponent of imputed rent, which is based on the twelve-month average of indexed mortgage lending rates, pushed imputed rent upwards by 0.7% MoM. The combined impact of the two subcomponents – the market price of housing and indexed interest rates – is to increase imputed rent by 0.8% in March (0.15% CPI effect).

The contribution of the housing component to headline inflation has weakened significantly. Of the March inflation figure of 9.8%, the housing component accounts for 3.1%. The weight of imported goods also fell MoM and now accounts for roughly 2.5% of headline inflation. We hope this trend will continue in the coming term. The weight of domestic goods in inflation remained flat between months, at 1.8%, while the weight of services increased to 2.4%.

Inflation set to keep falling

We forecast that inflation will continue to fall in the coming term as months with hefty increases drop out of twelve-month measurements. According to our preliminary forecast, the CPI will rise by 0.5% in April, 0.3% in May, and 0.5% in June. bringing headline inflation to 7.5% in June. We project inflation to average 8.0% in 2023.

As is common knowledge, the Central Bank (CBI) Monetary Policy Committee (MPC) raised the policy interest rate by 1% last week in response to stubborn inflation. A long journey lies ahead, and a number of factors must be in sync in order to bring inflation back to the CBI’s 2.5% target. But today’s inflation measurement will probably come as a great relief to the MPC and boost the likelihood that the Committee’s monetary tightening phase will come to an end soon.