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Our forecast: CPI to rise 0.4% 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 2.7% to 2.8%. The outlook is for inflation to measure 3.1% at the end of 2018 and average 2.9% through end-2019.

House prices and end-of-sale effects push strongly upwards

Rising house prices are the main contributor to the August increase in the CPI. Imputed rent, which largely reflects developments in house prices, raises the CPI by 0.17%. The housing component as a whole will push the index up by 0.21% in August.

End-of-sale effects will also push the CPI upwards, as is customary in August. Clothing and footwear prices will push the index upwards by 0.20%, and furniture and housewares by another 0.02%. We also forecast that food and beverages will raise the CPI by 0.05%.

 

Airfares set to fall

Very few items will pull the CPI downwards in August. The outlook is for a seasonal drop in airfares in the amount of 11% (-0.17% CPI effect), after a surge of more than 23% in July (0.31%). We project that the travel and transport component as a whole will lower the index by 0.15%.

Near-term inflation

Inflation looks set to pick up slightly in the next few months. We forecast that the CPI will rise by 0.3% in September, 0.3% in October, and 0.1% in November, bringing headline inflation to 3.1% in November. End-of-sale effects will make their mark on CPI measurements in September, but on the other hand, we expect a seasonal decline in airfares during those months.

We expect inflation to measure 3.1% by the end of this year and then average 2.9% and 3.0% in 2019 and 2020, respectively. Our long-term forecast is based on the assumption that wages and house prices will rise rather modestly and the ISK will hold relatively stable in the near term.

These factors are uncertain, however, wages in particular. If wage inflation gains momentum, inflationary pressures will increase accordingly.

Our forecast in August

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