We forecast a 0.4% CPI rise in August

We project that the consumer price index (CPI) will rise by 0.4% month-on-month in August. If this forecast materialises, headline inflation will rise from 1.8% to 1.9%. 

The medium-term inflation outlook is broadly unchanged from our last forecast, reflecting the prospect of a weaker ISK, on the one hand, and a slowdown in housing inflation, on the other. Inflation now looks set to align with the Central Bank’s (CBI) 2.5% inflation target around the turn of the year and then average roughly 3.0% throughout 2019. 

Housing, clothing, food, and petrol push upwards

As before, house prices are the main factor in the CPI increase in August, although our survey indicates a somewhat more modest price rise than in recent months. Imputed rent, which largely reflects developments in house prices, raises the CPI by 0.18%. The housing component as a whole will push the index up by 0.23% in August. 

Summer sales are winding down, and end-of-sale effects in clothing and footwear stores will raise the CPI by 0.19%, according to our forecast. End-of-sale effects also explain most of the 0.04% CPI increase stemming from the furniture and housewares component in the August forecast. 

Food and beverage price increases will raise the CPI by another 0.04%, according to our projections, and petrol prices yet another 0.04%, due mainly in both instances to the depreciation of the ISK since the beginning of June. 

Airfares and electronic equipment pull downwards

The outlook is for a marked drop in airfares, after a rise of more than 20% in July (-0.24% CPI effect). Various stores are still holding summer sales whose impact will be seen to some extent in August – not least among them electronics stores (-0.05% CPI effect). Other items combined will raise the CPI by 0.11% during the month. 

Inflation to gather pace in coming months

The outlook is for a moderate uptick in inflation over the next few months. We forecast that the CPI will rise 0.4% in September, 0.2% in October, 0.2% in November, and then 0.3% in December, leaving headline inflation at 2.5% by the end of the year. 

On average, the housing component will be the main driver of the rise in the CPI over the period, contributing about 0.2% per month. End-of-sale effects will affect the September CPI measurement as well. We also expect a seasonal decline in airfares in September. Furthermore, the depreciation of the ISK since early June will show in higher prices of various imported goods in coming months. 

Inflation slightly above target in coming years

The outlook is for domestic inflation to remain moderate over the forecast horizon, as long as the ISK does not weaken unduly. The depreciation in the past few weeks affects our exchange rate assumptions, however, and we now assume that the ISK will be somewhat weaker over the next few years. As a result, our forecast allows for higher inflation in coming quarters. On the other hand, we expect housing inflation to lose pace, with the overall result that our medium-term inflation forecast is broadly unchanged from our last forecast. 

We expect inflation to rise slightly over the coming winter but to settle next spring at just above the 2.5% target. We project that it will average 3.1% in 2018 and 2.9% in 2019.