We forecast an unchanged CPI in November

We forecast that the consumer price index (CPI) will remain unchanged month-on-month in November, leaving headline inflation unchanged as well, at 1.9%. 

The medium-term inflation outlook is broadly unchanged since our last forecast; however, inflation now looks set to rise more rapidly in 2018 than we assumed previously and then subside accordingly faster as the forecast period advances. Statistics Iceland (SI) is scheduled to publish its November CPI measurement at 9:00 hrs. on 28 November. 

Inflation measurement short on big news? 

It looks as though SI’s November CPI measurement will contain few surprises. A stable ISK and negligible changes in the cost price of many goods will probably cause most subcomponents to remain broadly flat. The biggest news in our forecast is the prospect of a small increase in imputed rent, which tends to track housing market prices. We expect it to rise by only 0.2% this month (0.04% CPI effect). 


This slight rise will be offset by a reduction in electricity costs for Reykjavík Energy (OR) customers, which took effect at the beginning of the month. The component as a whole therefore raises the CPI by only 0.03%, which is due to an increase in paid rent and maintenance costs. 

Our survey indicates that airfares will fall markedly in November (-0.14% CPI effect). Other downward-pushing items are housewares, appliances, and telephone services, all of which are forecast to decline slightly in price. 
On the other hand, petrol is one of the main upward-pushing items. Global oil prices have risen by over 20% since the beginning of September, causing a noticeable yet still modest (0.04% CPI effect in November) rise in domestic fuel prices. 

Food prices rose significantly in October, but we do not expect any considerable overall change this month. 

Inflation to pick up in coming months

The outlook is for inflation to gain pace over the next few months. We expect the CPI to rise 0.3% in December, leaving headline inflation at 2.1% by the end of the year, then fall by 0.3% in January and rise by 0.7% in February. 

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 a much more muted effect than could be seen early in 2017. We expect the usual seasonal spike in airfares in December. In January, another seasonal pattern will emerge: the inflationary effects of year-end rises in public unit levies, counterbalanced by winter sales. In February, end-of-sale effects will make their mark on inflation measurements.

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 3.0% by the end of the year, and then average 2.8% 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.

Alternative scenarios 

The ISK and house prices will be the two most important determinants of inflation in the coming term. We have prepared two alternative scenarios that shed light on how inflation could develop if these two items diverge from our baseline forecast. On the one hand, we assumed that house prices would rise by 0.2% each month instead of developing according to our baseline example, which is summarised in the table above. On the other hand, we sketched out a scenario showing the impact of a 10% linear depreciation in the ISK in both 2018 and 2019. It should be borne in mind, however, that these two changes are not assumed to have any derived impact on other items in the forecast, such as wage costs. 

As the chart shows, in the event of a slow rise in house prices (all else being equal), inflation would remain below the CBI’s inflation target for the entire forecast horizon. However, a significant depreciation of the ISK would cause it to rise above target quickly and peak at just over 5% in H1/2019.