We forecast a 0.2% decline in the CPI in July

We project that the consumer price index (CPI) will fall 0.2% in July. If our forecast materialises, twelve-month inflation will rise marginally, from 2.2% to 2.3%.
The inflation outlook for the remainder of the year is positive. As before, we assume that inflation will rise next year, as economic activity gathers pace, but remain well below the average of recent years. Statistics Iceland (SI) will publish the July CPI at 9:00 hrs. on 23 July

Summer sales at their peak, but many prices are on the rise

With summer sales in full swing, sales are a leading factor in the drop in the CPI in July. We expect this year’s sales effects to be similar to those in recent years, with clothing and footwear prices lowering the index by 0.5% during the month.

On the other hand, indicators suggest that a number of CPI components will rise somewhat in July. The main source of upward pressure is the rise in the travel and transport component (0.10% CPI effect), which is due to an increase in fuel prices (0.06% CPI effect) and airfares (0.05% CPI effect) since SI’s last measurements. Furthermore, we expect a marked rise in the housing component (0.09% CPI effect), owing primarily to Reykjavík Energy’s price hikes in electricity and home heating (0.04% CPI effect). According to our analysis of housing market data, imputed rent (which primarily reflects the market price of housing) rose by 0.2% between June and July (0.03% CPI effect). Our price measurements indicate that condominium prices in the greater Reykjavík area rose, whereas detached housing in greater Reykjavík and overall housing in regional Iceland declined in price.

Telecom companies made major price changes at the beginning of July, and we expect telephone services to raise the CPI by 0.05% as a result. And finally, we anticipate a CPI effect of 0.04% from increased hotel and restaurant services. We expect other items to make less of an impact.

Inflation broadly unchanged through the year-end

The next two months will be coloured by end-of-sale effects and seasonal increases in various services items. The price reductions owing to summer sales are short-lived, of course, and will reverse entirely during this period. In addition, services related to culture, recreation, and athletic activities generally rise at the end of summer.
We forecast a 0.4% rise in the CPI in both August and September, followed by a 0.1% increase in October. According to our forecast, inflation will measure 2.4% in August and September and 2.5% in October. We then expect it to taper off slightly, falling to 2.2% by 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 3.0% in 2015 and 3.1% in 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.

July inflation forecast