CPI to fall 0.1% in September

We project that the consumer price index (CPI) will fall by 0.1% month-on-month in September. If this forecast materialises, inflation will hold steady at 2.2%, remaining below the Central Bank’s (CBI) 2.5% inflation target.
In our opinion, the medium-term inflation outlook has improved since the last forecast, in part due to the appreciation of the króna. We expect inflation to rise above the CBI’s 2.5% inflation target before the year-end, however, owing mainly to base effects. The outlook is for rising inflation thereafter. The forecast indicates that inflation will be well below 4.0%, the upper deviation threshold of the inflation target, in 2016 but will move close to it in 2017. Statistics Iceland (SI) will publish the CPI for the month at 9:00 hrs. on 25 September. 

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

As usual, end-of-sale effects will put considerable upward pressure on the CPI in September. Clothing and footwear prices rose somewhat less than average in August, however, prompting us to expect the increase in September to be somewhat larger than last year’s. We project that end-of-sale effects will raise the CPI by 0.24%, with clothing and footwear accounting for 0.19%. The impact of these items is greater than it was last year, although below the average from before that time, as the weight of the clothing-footwear component in the CPI has diminished.
Furthermore, we estimate that the housing component will raise the index by 0.16% in September. This is due in particular to a MoM increase of 0.8% (CPI effect 0.13%) in imputed rent, which mainly reflects the market price of housing. We estimate that the annual increases in fees for athletic and recreational activities and entertainment will push the CPI up by 0.08%. 

Petrol prices and airfares pull downwards

On the other hand, the travel and transport component of the CPI will decline markedly in September (-0.50% CPI effect) for the second consecutive month. Reduced airfares are the predominant factor here (-0.35% CPI effect), with our survey indicating a significant MoM decline in international airfares. Furthermore, oil companies have cut petrol prices considerably since the August CPI measurement. The total drop in petrol prices amounts to 5.3% during the period (-0.19% CPI effect).
Among other items lowering the CPI is the 2.8% price cut introduced by IKEA in August, which will affect furniture and housewares both directly and indirectly in September, as IKEA has a large market share and affects pricing in the less expensive part of this market. We expect a 1.8% decline in furniture and housewares prices (-0.03% CPI effect) in September. 

Inflation above target by year-end

We expect inflation to rise as the days grow shorter and the year comes to a close, largely because the period of price stagnation in H2/2015 will drop out of twelve-month CPI measurements. That stagnation was due for the most part to favourable developments in petrol prices, changes in taxes and levies on consumer goods, and relatively modest domestic cost pressures in the wake of moderate wage settlements early in 2014.
For October and November, we expect a 0.1% rise in the index each month, followed by an increase of 0.2% in December. According to this forecast, inflation will rise above the target in November, measuring 2.8%, and settle back to 2.7% by the year-end. Our forecast assumes that the planned cancellation of import duties on clothing and footwear at the end of the year will affect prices in coming months, prompting retailers to cut prices as early as October. Developments could mirror those in the retail electronics subsector last year, when retailers anticipated the year-end excise tax reduction by lowering prices in advance.
Domestic inflationary pressures are considerable at present. A major cause of this is the hefty pay increases landed by a large segment of the labour market in the recent wage negotiations, although the rise in real house prices, weak productivity growth, and the growing tension in many parts of the economy make an impact as well. These factors will tend to push inflation upwards. Pushing in the other direction, however, is the marked appreciation of the króna in the recent term, coupled with limited imported inflationary pressures. We expect inflation to pick up in 2016, rising to 3.4% by the end of that year and to 3.9% in 2017. According to this forecast, inflation will be just below the upper deviation limit of the CBI’s inflation target in the latter half of the forecast horizon.

Inflation forecast for September