CPI to decline 0,2% in July
We project that the consumer price index (CPI) will fall by 0.2% month-on-month in July, bringing headline inflation back down below the Central Bank’s (CBI) 2.5% inflation target, to 2.4%.
The medium-term inflation outlook is broadly unchanged from our last forecast. The outlook is for inflation to average 3.0% by end-2018. Statistics Iceland (SI) will publish the July CPI at 9:00 hrs. on 29 July.
Seasonal sales a strong determinant
Summer sales are in full swing at present, with a strong impact on our forecast for July. We expect reductions in clothing and footwear prices to lower the CPI by 0.40% and furniture and housewares to lower it by another 0.07%.
House price inflation eases
According to our survey, house price inflation is losing steam, and imputed rent — mainly a reflection of house prices — will lower the CPI by 0.04%, owing mainly to the prospect of a decline in condominium prices in greater Reykjavík. House price inflation has receded noticeably from its H1/2017 peak. We expect the housing component as a whole to remain unchanged month-on-month in July.
Airfares and petrol pull upwards
We forecast that both airfares and petrol prices will rise between months. Airfares will raise the CPI by 0.2%, following the usual seasonal pattern. In addition, fuel prices have risen somewhat in recent months, and we expect July to be no different, as our survey indicates that they will raise the CPI by 0.03% during the month.
Inflation looks set to pick up slightly in the next few months. We forecast that the CPI will rise by 0.4% in August, 0.3% in September, and 0.3% increase in October. leaving headline inflation at 2.5% in October. End-of-sale effects will make their mark on CPI measurements in August and September, but on the other hand, we expect a seasonal decline in airfares during those months.
We project that inflation will measure 2.8% by the end of the year and average 2.9% in 2019 and 2020.