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We forecast a 0.3% rise in the CPI in December

We project that the consumer price index (CPI) will rise by 0.3% month-on-month in December. If this forecast materialises, inflation will fall from 1.0% to 0.8%, below the lower tolerance limit for the Central Bank’s (CBI) inflation target. If these projections are borne out, headline inflation will be at its lowest since the beginning of 1998. 

Short-term inflationary pressures are now at a low ebb, and we expect low inflation figures in coming months. Actually, we expect it to be below the CBI’s 2.5% target throughout 2015 and then rise thereafter as the economy gets moving, although it will remain fairly close to the target. Statistics Iceland (SI) will publish the CPI for the month at 9:00 hrs. on 19 December. 

Steep rise in airfares

International airfares are the main driver of the rise in the CPI in December; in fact, if the 0.34% CPI effect from airfares were excluded, the CPI would remain flat between months. Our survey indicates that it costs considerably more to fly overseas in December than in the months immediately preceding, but we expect the price hike to retreat to a large extent in January. 

Petrol prices fall, with further declines expected

Petrol prices have fallen sharply in recent weeks, as global oil prices have dropped more than a fifth in ISK terms since the beginning of November, with foreign petrol product prices falling commensurably. We estimate the CPI effect of the decline in petrol prices at -0.13% in December.

We expect further declines in coming months, as we see further scope for price cuts, in view of developments and prospects abroad. In addition, oil charges will not increase at the end of the year, and value-added tax on petrol will decline. Actually, petrol prices have already fallen by roughly 1.3% since Statistics Iceland (SI) measured the CPI for December, and we anticipate further declines in coming weeks. Assuming relatively modest additional declines in petrol prices, we estimate the CPI effect of the fuels and lubricants component at around -0.2% in January and February 2015, although the downward effect on the CPI could easily turn out more pronounced than this. 

Downward effect from house prices and excise tax cancellation

Imputed rent, which is largely a reflection of developments in house prices, fell unexpectedly in November. Based on our price survey, we expect another decline in December (-0.04% CPI effect). Imputed rent has turned around in recent months, and we are curious to see how it moves after the turn of the year, although favourable interest rates and the effects of the Government’s debt relief measures will probably support house prices in the near term. 

We expect to see further effects from the planned cancellation of excise taxes in the price of household appliances and electrical equipment in December (-0.03% CPI effect), and we assume that clothing and footwear prices will fall as well (-0.02% CPI effect). On the other hand, we anticipate a modest increase in food prices during the holiday season (0.02% CPI effect). Other items will have a less pronounced effect on the CPI this month. 

Negligible rise in the CPI in Q1/2015

We project that the CPI will fall 0.8% in January 2015 and then rise by 0.5% and 0.4%, respectively, in February and March. The index will therefore rise by a total of 0.1% over the first quarter, reflecting the annual tug-of-war between winter sales and price list increases in January. In addition, changes in the value-added tax system and excise taxes will have a palpable effect in coming months. Although a fair portion of the impact of the excise tax cancellation will already have surfaced by the end of the year, on the whole, we expect the changes in the tax system to have a modest downward effect on the CPI in January. Furthermore, we expect airfares to fall markedly when the holiday season is past. And finally, the decline in petrol prices will have some effect, as is mentioned above. 

End-of-sale effects will make themselves felt in February and March, and if the ISK remains stable and there are no major cost pressures from private sector wage agreements, other inflationary pressures should be quite modest during both months. 

Inflation below target throughout 2015 

According to our forecast, inflation will average 0.6% in Q1/2015 and then rise steadily thereafter, reaching 2.1% by the end of the year. In 2016 the pace will increase yet again, to about 2.8% for the year as a whole. The main drivers of inflation will be rapid increases in private sector wages, continued rises in real house prices, and elevated imported inflation. Inflation will be close to inflation target at the end of the forecast horizon, however, and if developments are consistent with the current outlook, Iceland will see its longest period of low, stable inflation in a decade and a half. 

Inflation forecast

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