News

CPI expected to rise 0.2% in May

nullWe project that the consumer price index (CPI) will rise by 0.2% in May, bringing headline inflation from 2.3% to 2.6%, as the CPI fell by 0.05% in May 2013. The inflation outlook for the current year is quite benign and is broadly unchanged from our last forecast. The outlook for the next few years has improved slightly, however, although we still expect inflation to rise ssomewhat as economic activity picks up. In our opinion, it will nonetheless be well below the average of recent years. Statistics Iceland (SI) is scheduled to publish the May CPI at 9:00 hrs. on 28 May.

House prices the main driver of inflation

nullThe housing component of the CPI explains the lion’s share of this month’s increase. Market indicators suggest that imputed rent, which mainly reflects the market price of housing, will rise by 0.8% month-on-month in May (0.11% CPI effect). The housing component as a whole will raise the CPI by 0.14% in May.

Other subcomponents that we project to affect the MoM change in the CPI are hotels and restaurants (0.06% CPI effect), food and beverages (0.05%), and travel and transport (-0.06%). As regards the first of these, the seasonal rise in hotel accommodation during the peak tourist season will have an effect. The forecasted rise in food and beverage prices is based on our price survey, with most of the increase due to meat and vegetables prices. Finally, the impact of the travel component is due to a drop in international airfares. Airfares have risen by nearly 20% over the past three months, and there are signs that a decline is in the offing.

Inflation broadly unchanged through the year-end

nullThe inflation outlook for the next several months is broadly unchanged from our last forecast. It has now been decided that the decline in the fixed-amount levies on alcoholic beverages, tobacco, and petrol will take effect in June, lowering the CPI slightly during that month. In other respects, the upcoming few months look set to be rather uneventful as regards price developments, apart from the seasonal sales and end-of-sale effects in July and August.

We forecast a 0.2% rise in the CPI in June, a 0.3% decline in July, and a 0.4% increase in August. According to that forecast, inflation will measure 2.2% for all three months. We expect it to hover around that level for the remainder of the year, measuring 2.3% at the year-end.

We then expect inflation to increase moderately in 2015. Presumably, demand-side pressures will escalate somewhat, which will show in more rapid wage increases and continued increases in real house prices. We project inflation to average 3.1% in both 2015 and 2016.

Our long-term forecast is based on several assumptions: that house prices will rise by 5-7% each year, that wages will rise more rapidly starting in 2015, as the slack in the economy disappears, and that the ISK exchange rate will remain close to its current level. The changed assumption concerning the ISK is in line with our recent macroeconomic forecast, which outlines the grounds for this projection. We had previously assumed that the ISK would depreciate somewhat during the forecast horizon, and this change is the reason the inflation outlook for the next two years is quite a bit brighter than it has been in the recent past. It goes without saying that this assumption concerning the exchange rate is highly uncertain, although exchange rate volatility has indeed diminished as a result of the Central Bank’s more aggressive intervention in the foreign exchange market.

May inflation forecast

Back

Netspjall