End-of-sale effects and rising food prices

As is typical for February, the end of seasonal sales will affect the CPI measurement for the month, as this year’s January sales were the deepest since before the pandemic. According to our forecast, furniture and housewares prices will rise by 4.5% (0.27% CPI effect), erasing most of the 5.5% reduction during last month’s sales. Clothing and footwear prices will rise as well, by 5.4% (0.17%), after falling by over 8% in January.

The price of food rose nearly 2% in January, the largest MoM increase in eight years. The jump is due mostly to higher dairy product prices, although other products rose in price as well, including vegetables and bread. We expect the trend to continue in February, with food and beverage prices rising by 1.4% (0.22%). In our estimation, food prices will keep climbing in coming months, but at a considerably slower pace.

Other key items pushing the CPI upwards in February are recreation and culture, up 0.5% (0.04% CPI effect), and hotels and restaurants, up 0.8% (0.04%).

The travel and transport component is the only CPI item to fall this month. We forecast a decline of 0.7% (-0.12%), owing mainly to a 4.2% drop in airfares (-0.08%). The price of motor vehicles is also expected to fall (-0.03% CPI effect), and a marginal slide in fuel prices (-0.01%) is anticipated as well.

Tranquil housing market, but rising interest rates

The housing market has cooled, as can be seen clearly in various figures from the past few months. The market price of housing fell by 0.2% MoM in January, thereby showing its first decisive decrease since May 2020. On the other hand, the interest component has kept climbing, as it is based on indexed mortgage lending rates. We expect this trend to remain in place, with imputed rent rising by 0.45% (0.09% CPI effect) between months, driven entirely by the interest component.

Other items falling under the housing component are also expected to rise MoM: paid rent is set to increase by 0.6% (0.03%) and home repair and maintenance by 1.6% (0.02%), according to our forecast.

Inflation is tapering off

Headline inflation measured 9.9% in January, in a reprise of last July’s local peak. If our forecast materialises, it will fall to 9.6% in February. The outlook is for a continued decline in the months to follow: according to our preliminary forecast, the CPI will rise by 0.6% in March, 0.4% in April, and 0.3% in May. If this forecast is borne out, twelve-month inflation will measure 7.8% in May.

A long journey lies ahead, and a number of factors must line up in order for inflation to return to the Central Bank’s target. In our opinion, the main near-term uncertainty is imported inflation, but the ISK will need to be more stable than it has been recently if it is to provide a satisfactory buffer against further rises in import prices. Another important uncertainty centres on the still-outstanding wage agreements. If all forces work together, inflation could lie in the 5-6% range at the end of this year. According to our long-term forecast, it will average 7.5% in 2023, 4.4% in 2024, and 2.8% in 2025.

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