CPI to rise 0.2% in September

We project that the consumer price index (CPI) will rise by 0.2% in September, lowering twelve-month inflation from 2.2% to 2.1%. 

As before, the inflation outlook for this year is good – and actually somewhat improved. We expect inflation to remain below the Central Bank’s inflation target through the year-end and then rise thereafter, as the economy gains traction, yet remain modest by Icelandic standards. Statistics Iceland (SI) will publish the CPI for the month at 9:00 hrs. on Thursday 25 September. 

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 September. Clothing prices rose somewhat more than usual in August, and we expect end-of-sale effects to be less pronounced in September as a result. Overall, we project that end-of-sale effects will raise the CPI by 0.25%, with clothing and footwear accounting for 0.2%. 

Furthermore, we estimate that the housing component will raise the index by 0.14% in September. Market indicators imply that the month-on-month rise in imputed rent will be similar to the 0.6% measured in August. We estimate that the annual increases in fees for athletic and recreational activities and entertainment will push the CPI up by 0.07%. 

...while travel component pulls it downwards 

On the other hand, the travel and transport component of the CPI will decline markedly in September (-0.26% CPI effect) for the second consecutive month. Reduced airfares are the predominant factor here (-0.25% CPI effect), with our survey indicating a significant MoM decline in international airfares. We also expect a decline in the price of petrol, new motor vehicles, and bicycles (combined -0.04% CPI effect). Other components will have a lesser impact, raising the CPI only marginally, according to our forecast. 

Inflation below target throughout the year 

We expect the CPI to rise by a total of 0.7%% in Q4: 0.2% in October, another 0.2% in November, and 0.3% in December. According to this forecast, inflation will measure 1.9% at the end of the year. This lack of short-term inflationary pressures is due to a number of factors, including extremely low imported inflation, as the ISK is stable and foreign prices of various goods – food and petrol among them – have fallen rather than rising in the recent term. Furthermore, wage pressures remain relatively modest, probably because the moderate nominal pay increases negotiated in the early 2014 wage settlements are generating reduced inflationary pressure. 

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 2.7% 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 September