Various price hikes kick in at the year-end, albeit offset by seasonal sales

All sorts of price hikes took effect at the turn of the year, including various price lists and public levies. Chief among upward-pushing items is the expiry of the cancellation of value-added tax on new electric and hydrogen-powered motor vehicles. Instead of this, the Energy Fund (is: Orkusjóður) provides subsidies for the purchase of electric and hydrogen-powered cars priced at under ISK 10m, somewhat mitigating the cost hikes. We forecast that this change will increase motor vehicle prices by around 6.5% (0.35% CPI effect) between months.

According to our forecast, alcoholic beverages and tobacco will rise in price by 3.5% (0.08% CPI effect) and petrol by 1.6% (0.05%). Both of these price hikes are due mainly to year-end increases in unit levies. We also expect food and beverages to rise in price by 0.6% (0.09%), owing mainly to hikes in dairy product prices (0.06%) stemming from increases announced by the agricultural pricing committee and taking effect in January.

Other upward-pushing items are recreation and culture (0.03% CPI effect) and other goods and services (0.06%).

Seasonal sales typically start in January, pushing the CPI downwards temporarily. According to our measurement, clothing and footwear prices will fall by 8.5% (-0.34% CPI effect) and furniture and housewares prices by 5% (-0.31%). Airfares will also fall this month, albeit far less than usual, as they rose less sharply in December than they generally do. According to our forecast, they will fall by 5% (-0.09%).

Is the housing market rebalancing?

The housing market has calmed down quite a bit and is far healthier now than it was just over a year ago. In December 2023, twelve-month house price inflation measured 4.2%, down from the summer 2022 peak of 25%. Prices have nevertheless been fluctuating, and it has proven difficult to forecast single-month movements. Although continued short-term volatility cannot be ruled out, we think the market will be fairly tranquil over the medium term, with relatively small year-on-year increases.

We project that imputed rent will rise by 0.6% MoM (0.12% CPI effect) in January. This is due in no small part to the interest component, which we expect to account for 0.5% of imputed rent, with the other 0.1% stemming from house prices.

The inflation outlook further ahead

Headline inflation eased in December, in defiance of forecasts, and now measures 7.7%. We are fairly optimistic that it will keep tapering off in coming months, and quite quickly at that, mainly because large monthly rises from H1/2023 will drop out of twelve-month measurements. Our preliminary forecast is as follows:

• February: CPI up 0.8% – headline inflation 6.6% – driven mainly by end-of-sale effects
• March: CPI up 0.5% – headline inflation 6.6% – with end-of-sale effects extending into March
• April: CPI up 0.6% – headline inflation 5.9% – driven by seasonal rise in airfares

If this forecast is borne out, twelve-month inflation will measure 5.9% in April. This forecast is highly uncertain, of course, and for the immediate future the main question marks are house prices and the ISK exchange rate, which must remain stable if the premises underlying our forecast are to hold.

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