Our forecast: CPI to rise 0.3% in August

We project that the consumer price index (CPI) will rise by 0.3% in August. If the forecast materialises, twelve-month inflation will taper off slightly, from 2.4% to 2.3%. 

As before, the inflation outlook for this year is good. We expect inflation to hold close to the Central Bank’s inflation target through the year-end. Thereafter, we expect it to begin to rise as economic activity picks up, although it will remain below the levels seen in recent years. Statistics Iceland (SI) will publish the CPI for August at 9:00 hrs. on 27 August. 

End-of-sale effects and house prices push the CPI upwards …

As usual, end-of-sale effects will exert considerable upward pressure on the CPI in August. We anticipate end-of-sale effects similar to those in recent years and assume that they will raise the CPI by 0.3%. 

Furthermore, we estimate that the housing component will raise the index by 0.1% in August. Indicators from the market suggest that imputed rent, which primarily reflects changes in house prices, will rise by 0.6% in August, after falling in June and holding steady in July. 

...and airfares and petrol prices push it downwards 

On the other hand, it appears that the travel and transport component of the CPI will fall noticeably in August (-0.17% CPI effect), due to declines in two major subcomponents. One of these is fuel prices (-0.07% CPI effect), which have fallen markedly at Icelandic petrol stations in the wake of declining global prices, and the other is international airfares, which we expect to fall sharply after the steep rise in June and July (-0.09% CPI effect). Other components will have a lesser impact, raising the CPI by approximately 0.05% combined, according to our forecast. 

Inflation broadly unchanged through the year-end 

We assume that inflation will be modest for the rest of the year. End-of-sale effects and seasonal increases in the price of recreation-, culture-, and sports-related services will probably make an impact in September, however, and we expect the CPI to rise by 0.5% during the month. We project a rise of 0.2% in October and another 0.2% in November, followed by an increase of 0.3% in December. According to this forecast, inflation will measure 2.3% at the end of the year. 

For next year, we project somewhat higher inflation than in 2014. Presumably, increased economic activity will be reflected in swifter pay rises and continued increases 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% per year throughout the forecast horizon, that wage hikes will gain pace in the near future as tension grows in the labour market, and that the ISK exchange rate will remain broadly unchanged. 

Inflation forecast for August