CPI up 0.04% in July

Headline inflation turned out higher than we had expected this month, owing mainly to a persistent rise in house prices, particularly in regional Iceland. Other domestic and foreign inflationary pressures have also gained strength in the recent past, however. The outlook is for inflation to remain roughly at the current level in the months to come. 
According to figures released recently by Statistics Iceland (SI), the consumer price index (CPI) rose 0.04% month-on-month in July, raising twelve-month inflation to 2.7% from the June measurement of 2.6%. The CPI excluding housing declined by 0.26% between June and July but has risen by 1.4% in the past twelve months. 
We had projected that the CPI would fall by 0.2% MoM, whereas forecasts as a whole ranged from a 0.2% decline to a 0.1% increase. The difference between our forecast and SI’s actual figures lies mainly in a 1.0% jump in imputed rent (CPI effect 0.22%), which is largely a reflection of house prices. Airfares rose even more than we had expected, however, or by 23.0% (0.31%).

Housing component pushes upwards

House prices as measured by SI have been rather erratic in the past few months. As in recent quarters, the housing component of the CPI is the main driver of headline inflation. In the July measurement, the component as a whole rose by 0.77% (0.27% CPI effect). Paid rent increased by 0.32% (0.01%), but the main determinant was the 1% rise in imputed rent (0.22%). 
SI’s house price subcomponents illustrate developments by property type and location. All subcomponents of the index rose month-on-month in July, condominium housing in the greater Reykjavík area by the smallest amount, or 0.3%, and detached housing in the capital area by about 1.2%. But regional Iceland showed the largest price hikes by far: 3.3% between months and 12.5% year-to-date. 
  According to SI figures, house prices overall have risen by only 6% in the past twelve months, far below the peak of 24%, reached last May. It appears, then, that the market is growing more balanced. The rapid rise in regional Iceland house prices is noteworthy, however, and probably reflects growing demand for property in communities such as Reykjanesbær and Árborg, on the periphery of the capital area. 

Airfares and health component rise

The travel and transport component as a whole rose by 1.9% (0.33% CPI effect), led by a 20.3% increase in air transport prices (0.31%). This is slightly more than we had anticipated, although a jump in airfares is to be expected over the peak summer season. The health component also rose in the July measurement, by 0.69% (0.03%).

Seasonal sales effects as expected

The effect of seasonal sales on consumer prices in July was broadly in line with our expectations. The clothing and footwear component declined by 11.3% during the month (-0.41% CPI effect). The category called “other goods and services” fell by 0.70% (-0.04%), and furniture and housewares prices fell by 0.36% (-0.01%). In addition to these items, most of the 0.11% decline in food and beverages prices (-0.01% CPI effect) was due to the impact of seasonal sales.

Inflation broadly unchanged in the near term

The outlook is for inflation to ease slightly in the next few months and remain marginally above the CBI’s 2.5% inflation target. We forecast that the CPI will rise by 0.4% in August, 0.3% in September, and 0.3% in October, leaving headline inflation at 2.8% in October. In the main, the housing component will be the strongest driver of inflation over this period, according to our forecast, and end-of-sale effects will make their mark on measurements in the autumn. We also expect a seasonal decline in airfares in August and September.