OUR FORECAST: CPI to rise 0.9% in March
We project that the consumer price index (CPI) will rise by 0.9% month-on-month in March. If this forecast materialises, headline inflation will rise from 0.8% to 1.4%, bringing to an end – for the present, at least – the short episode of inflation below the lower deviation threshold of the Central Bank’s (CBI) inflation target. However, inflation will remain below the target itself, which is 2.5%.The outlook has deteriorated somewhat, even though short-term inflationary pressures are still limited. We expect inflation to be below target for most of 2015 and then rise above it as the economy gets moving, although it will remain fairly close to the target. Statistics Iceland (SI) will publish the March CPI at 9:00 hrs. on 27 March.
House prices up sharply
House prices have risen swiftly in recent months, after keeping a relatively modest pace for most of 2014. This change in the housing market is probably due to the Government’s mortgage debt relief package, which kicked in around the turn of the year and increased many households’ collateral capacity while reducing debt service. SI’s measurement of this component in March will extend over the December-February period, when the debt relief measures were implemented.
Steep rise in travel component
Modest end-of-sale effects
We do not expect other major subcomponents to make a strong impact on the March CPI. For instance, food prices should change only modestly, unlike the situation in March 2014. In addition, wage settlements are still pending, so wage-related cost pressures are limited, which is also unusual for this time of year. This peaceful interlude may prove a short-lived one, however.
Moderate near-term inflationary pressures
Inflation back above target by year-end
The uncertainty in the forecast is concentrated on the upside, however, for two main reasons. First of all, the upcoming wage settlements could generate more rapid rises in nominal wages than we expect, even though the current short-term outlook is for protracted negotiations. Second, we base our forecast on the assumption that the exchange rate will remain close to its current level, as the ISK has been extremely stable in recent quarters. This could change, however, if steps taken towards lifting the capital controls are accompanied by increased exchange rate volatility and elevated risk of massive foreign exchange outflows, at least temporarily. As regards this latter factor, however, the outlook has improved markedly in the recent term, and the likelihood of a sustained depreciation of the ISK has diminished accordingly.