CPI projected to rise 0.3 in October

nullWe expect the consumer price index (CPI) to rise by 0.3% month-on-month in October. If this forecast materialises, twelve-month inflation will remain unchanged at 3.9%. The inflation outlook appears to have improved marginally in the recent past, but major uncertainties remain for the longer term. Statistics Iceland (SI) plans to publish the next CPI on 25 October at 09:00 hrs.

Less October increase than previously expected

Our forecast for October is 0.2 percentage points lower than our preliminary forecast. The change is due to three relatively important factors that appear to be developing differently than we expected. First of all, our research indicates that imputed rent, which largely reflects the market value of housing, will remain unchanged or even fall slightly in the October CPI, whereas we had projected an increase. Second, petrol prices have fallen by 1.5% (-0.09% CPI effect) since the September index was published. And in the third place, we predicted a strong rise in international airfares in our preliminary forecast, but subsequent examinations indicate that this will not materialise.

According to our current forecast, food and beverages will contribute most to the rise in the index (0.11% CPI effect). To a large degree, this is due to the 3% increase in milk and dairy products that took effect at the beginning of the month. In addition, the outlook is for a rise in the price of meat, fish, and fruit. We also project that recreation and culture will contribute 0.06% to the rise in the CPI, most of it due to seasonal increases. The rise in furniture and housewares prices will contribute another 0.03% to the rise in the index. Other items will make a less marked impact.

Near-term outlook slightly improved

nullThe inflation outlook for the coming months and quarters has improved slightly from our last forecast. We anticipate a 0.2% rise in the CPI in November and a 0.3% rise in December. The November forecast is not particularly newsworthy, as is often the case during that month, but in December, airfares (0.12% CPI effect), food (0.06%), and the housing component (0.06%) will push the index upwards. In both months the CPI will be affected somewhat by a weakening of the ISK, although it should be borne in mind that the depreciation so far this autumn is much smaller than it was last year, and we expect this trend to continue.

In all, the CPI will rise 0.8% in Q4, according to our forecast, raising inflation to 4.1% by the end of the year. We then expect inflation to taper off slightly to 3.7% by year-end 2014. We base this on several assumptions: that wages will continue to rise as they have in the recent past, that the exchange rate will fall somewhat, more or less following its usual seasonal pattern, and that real house prices will rise by approximately 1.7%, on average, next year. This forecast is subject to considerable uncertainty, as the results of the forthcoming wage negotiations are still unclear and, as always, developments in the exchange rate are uncertain.

Inflation forecast in October