The CPI rose 0.28% month-on-month in October, lowering headline inflation from 5.4% to 5.1%. We had projected that the index would rise by 0.4%, bringing twelve-month inflation down to 5.2%. The main difference between our forecasts and Statistics Iceland’s measurements is a far smaller rise in imputed rent than we have seen in a long time – and smaller than most forecasters had anticipated. On the other hand, food prices rose more than we had expected. In other respects, all CPI components moved broadly in line with our expectations. The October measurement is the last one to appear before the Central Bank (CBI) Monetary Policy Committee’s (MPC) 20 November policy rate decision.
Inflation continues to ease
Twelve-month inflation fell in October, and the outlook is for a continuing decline in coming months. The main upward-pushing items this month were airfares and food prices, while a cooling rental housing market appears to have started affecting the CPI quite strongly. According to our preliminary forecast, inflation will fall below 5% next month.
Food and airfares push the CPI upwards
The price of food rose rather strongly between September and October, after falling for two months in a row. Food and beverage prices rose 0.84% MoM (0.12%). As we see it, this represents a correction after the entry of a new grocery store into the market, which pushed competitors’ prices downwards in Q3. Some of this month’s rise is due to higher meat prices, but the price of fruit is up sharply as well, making a stronger impact on the CPI (0.06%) than the price of meat has (0.04%). We expect modest food price hikes in coming months.
Apart from food prices, airfares were the main driver of this month’s rise in the CPI. International airfares rose 6.6% (0.12%), in line with our forecast. This increase in October is part of the typical seasonal pattern, which has not been particularly strong during the post-pandemic period. We expect airfares to decline in November and then reverse course once more in December – again, following the seasonal pattern.
Rise in the housing component loses steam
We had expected imputed rent to rise more slowly this month, driven by a cooling rental market and smaller price hikes due to indexation of leases. This projection was borne out, except that the slowdown was even more pronounced than we had anticipated, with imputed rent rising only 0.1% (0.02% CPI effect), while we had forecast an increase of 0.4% (0.08% CPI effect).
We do not expect large rises in imputed rent in the coming term, and we do not rule out the possibility of a decline. If the rental housing market continues to cool in coming quarters and inflation develops as expected, short-term inflation could be overestimated.
Per-kilometre charge incorporated into SI’s measurements
Concurrent with this morning’s CPI release, Statistics Iceland (SI) published information on the impact of adopting a per-kilometre charge for motor vehicle use instead of a fuel tax. According to that information, the cancellation or reduction of oil charges or other excise taxes on fuels would have a downward impact on the CPI. Most were already aware of this. However, SI stated as well that the per-kilometre charge will be classified as a road tax and will therefore have a downward effect on the CPI. SI cannot say how much the CPI will be affected until the final execution has been decided and weights of index components on the effective date of the changes have been determined.
Inflation in coming months
Today’s figures indicate that inflationary pressures are subsiding, and we expect them to keep receding in coming months. A cooling rental market could also result in considerably lower inflation in the coming term. We expect headline inflation to fall below the upper tolerance limit of the CBI’s inflation target in Q1/2025.
Prices abroad have been developing favourably. Inflation has realigned with targets in many countries, and inflationary pressures have eased more or less everywhere. Our updated preliminary forecast is as follows:
- November – CPI to rise 0.1% (twelve-month inflation 4.7%)
- December – CPI to rise 0.4% (twelve-month inflation 4.7%)
- January – CPI to fall by 0.1% (twelve-month inflation 4.8%)
This forecast assumes that the adoption of the per-kilometre charge and the cancellation of fuel taxes will carry roughly equal weight. Nevertheless, this is not a given. As SI points out, the ultimate impact will depend on the execution and the weighting of the relevant CPI components at the time the changes take effect.
Analyst
