According to our forecast, house prices will continue to rise. Imputed rent, mainly a reflection of housing market prices, has shot up more than 10% year-to-date, and we project that it will rise by 2.2% month-on-month (0.42% CPI effect). The housing market continues at a gallop, with no signs of a slowdown as yet, and the outlook is for prices to keep climbing in coming months. Hopefully they will settle down as the year progresses, once higher interest rates and increased supply begin to make their mark.

Imported inflation keeps rising

Apart from housing, the travel and transport component is the main driver of inflation. We expect the component as a whole to rise by 2.5% (0.39%) between months. The main driver here is petrol prices, which we expect to jump 6.7% (0.24% CPI effect). Prices are still fluctuating widely, as they have since the beginning of the war in Ukraine. Brent crude prices have risen in the past month, in accordance with our own measurement. We also expect airfares to rise by 7.5% MoM (0.16% CPI effect). In part, this is a seasonal phenomenon, as prices usually rise in June; however, the surge in fuel prices has contributed as well.

Other key items that will rise MoM include food and beverages, which will increase in price by 0.7% (0.10%), according to our forecast. The food/beverage component has risen nearly 5% in 2022 to date, and the increase in food prices looks set to continue in the next several months, owing to pandemic-related supply chain disruptions and the war in Ukraine. We also expect hotel and restaurant services to rise in price by 0.9% (0.05% CPI effect).

Inflation set to rise in coming months

The outlook is for imported inflation and house prices to keep rising in the next few months, pushing headline inflation still higher, if our forecast materialises. In our short-term forecast, we project that the CPI will rise by 0.4% in July, 0.6% in August, and 0.4% in September, and that inflation will measure 8.7% in September. We expect inflation to peak around that time and then start to subside – very slowly at first, and then more rapidly as 2023 advances.

There is considerable uncertainty afoot, however, and it is difficult to predict how long-lasting foreign price hikes will be. We assume that the ISK still has some upside potential this year, which will help offset higher imported inflation. A slowdown in house price inflation – a key assumption underlying our long-term forecast – would also offset imported inflation. We expect house prices to ease relatively quickly later this year, once rising interest rates and increased housing supply kick in.

Another important assumption behind our long-term forecast is that the wage negotiations set for late this year will not result in excessive pay rises. According to our long-term forecast, inflation will average 7.8% in 2022, 6.2% in 2023, and 4.0% in 2024.

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