CPI to rise 0.3% in October

We project that the consumer price index (CPI) will rise by 0.3% month-on-month in October,  raising headline inflation from 1.4% to 1.7%. 

The medium-term inflation outlook has improved somewhat since our last forecast, as the effects of increased competition are expected to contain inflation in coming months.  Inflation now looks set to remain below the Central Bank’s (CBI) 2.5% inflation target through this year and then average roughly 2.7% throughout 2019. 

Housing and travel push upwards

As usual, we expect the housing component to be the main upward-pushing item in the CPI in October. Our survey indicates that imputed rent, which largely reflects the market value of residential housing, will rise by 0.9% month-on-month (0.18% CPI effect).  The repair and maintenance portion of the housing component will rise by 1.7% (0.05% CPI effect), largely due to a hefty rise in domestic construction materials. 

International airfares declined markedly in September, and we expect them to reverse in October.  Our survey indicates that this item will push the CPI upwards by 0.10%.  Furthermore, we expect motor vehicle prices to rise for the third month in a row (0.03% CPI effect).  We project a roughly 1% rise in petrol prices as well (0.02% CPI effect).  And finally, we expect medical care and pharmaceuticals to push the CPI upwards by 0.02% during the month. 

Food and accommodation push downwards

Increased competition in the groceries market appears to have outweighed the depreciation of the ISK over the summer months.  Food prices fell by 1.3% in September, and we expect further decline in October (-0.06% CPI effect).  And now that the peak tourist season is past, we anticipate a drop in accommodation prices (-0.02% CPI effect).  In addition, we expect a slight decline in clothing and electronics prices, for a combined 0.03% reduction in the CPI during the month. 

Inflation to pick up in coming months

The outlook is for a slight uptick in inflation over the next few months.  We forecast that the CPI will rise 0.1% in November and 0.4% in December,  leaving headline inflation at 2.1% 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.  Even so, this is considerably less than in the first half of the year. Furthermore, we expect the usual seasonal surge in airfares in December. 

Inflation close to 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.  We expect the ISK to remain broadly unchanged from its recent average for the rest of the forecast horizon.  We also expect the housing market to cool and wage pressures to ease as the forecast period progresses. 

We expect inflation to align with the Central Bank’s 2.5% inflation target in the first half of 2018, rise to about 2.8% by the end of the year,  and then average 2.7% in 2019. It can therefore be said that according to our forecast, inflation will be quite close to the CBI’s target through end-2019.

Inflation forecast October 2017