CPI expected to rise 0.2% in June

We project that the consumer price index (CPI) will rise by 0.2% in June. If this forecast materialises, inflation will decline from 2.4% to 2.1%, as the CPI rose 0.5% in June 2013.

The inflation outlook for the current year is quite good. As before, we assume that inflation will rise next year, as economic activity gathers pace. In our opinion, it will nonetheless be well below the average of recent years. Statistics Iceland (SI) is scheduled to publish the June CPI at 9:00 hrs. on 27 June.

No major underlying price increases

nullAccording to our forecast, there are few major increases that are likely to drive inflation in June. The largest single determinant is the travel and transport component of the CPI, which we expect to contribute 0.06% to the increase in the CPI during the month, owing in part to rising fuel prices (0.02% CPI effect). At present, we expect little impact from international airfares (0.01% CPI effect), even though there are marked changes (in both directions) in airfares to specific destinations.

The forecasted rise in food and beverage prices (0.05% CPI effect) is based on our price survey, with most of the increase due to meat, fruit, and vegetables prices. We also expect the seasonal rise in hotel and restaurant services to raise the index by 0.03%.

In a departure from the recent pattern, data from the housing market indicate that the housing component (0.03% CPI effect) will have little impact on the CPI this month. Market indicators imply that imputed rent, which largely reflects the market price of housing, was unchanged between May and June. According to our measurements, detached housing prices in greater Reykjavík fell, while condominium prices in greater Reykjavík and overall house prices in regional Iceland rose.

Finally, it should be noted that that impact of the decline in fixed-amount levies on alcoholic beverages and tobacco (-0.02% CPI effect) will affect the forecast in June. According to our price measurements, however, not nearly all types of alcoholic beverages have declined in price as a result, and it may be that a number of importers have yet to lower their prices. If so, the decline will take effect later this summer.

Inflation broadly unchanged through the year-end

The inflation outlook for the next several months is broadly unchanged from our last forecast. We expect the months ahead to be rather uneventful in terms of price developments, with the exception of summer sales and end-of-sale effects.

nullWe forecast a 0.4% decline in the CPI in July and a 0.4% rise in both August and September. The drop in July is due to sale effects and will reverse in August and September. According to our forecast, inflation will measure 2.0% in July and August and 2.1% in September. We expect it to hover around that level for the remainder of the year, measuring 2.0% at the year-end.

We then expect inflation to rise somewhat in 2015. We assume that an output gap will develop, with accelerated wage increases and a continued rise 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 during the forecast horizon, that wages will rise more rapidly starting in 2015, as the output gap widens, and that the ISK exchange rate will remain close to its current level.

June inflation forecast