Inflation measures 3.4% in January

Winter sales and a drop in motor vehicle prices were the main drivers of the marked decline in the consumer price index (CPI) in January. The composition of inflation has changed considerably in the past year. Imported goods prices have begun to exert increasing upward pressure, whereas the inflationary effect of house prices has eased. The outlook is for inflation to continue above 3% in the near future but remain below the 4% upper deviation limit of the Central Bank’s (CBI) inflation target.

According to newly released figures from Statistics Iceland (SI), the CPI fell 0.4% month-on-month in January, lowering headline inflation to 3.4%, from 3.7% in December. The CPI excluding housing fell by 0.73% in January, however, and twelve-month inflation thus measured was 2.6%.

The January CPI measurement is at the low end of official forecasts. We had projected that the CPI would fall by 0.2% MoM, whereas forecasts as a whole provided for a decline ranging from 0.2% to 0.5%. The difference between our forecast and SI’s measurement lies largely in a larger decline in motor vehicle prices and a smaller rise in the housing component than we had expected.

Housing market better balanced than before

The difference between twelve-month house price inflation in greater Reykjavík versus regional Iceland has narrowed, according to the January CPI measurement. House prices in regional Iceland have now risen by 9.2% year-on-year, whereas in the capital area, single-family home prices are up 6.8% and condominium flats up 4.7% over the same period. In all, house prices have risen by 6.0% since January 2018. House price inflation has been relatively stable since last autumn, at about half the pace seen a year ago, suggesting that the housing market is growing more balanced, if this trend is any indication.


 CPI drop in January due to seasonal sales

Winter sales made the usual impact on the January measurement. Clothing and footwear prices, down 11.08% (-0.40% CPI effect), were the main driver of the decline in the index, followed by housewares, which fell in price by 4.92% (-0.2%), and petrol, down 0.42% (-0.01%).

Airfares fell in January, as they often due after the Christmas peak, although this year’s decline, at 4.57% (-0.07%), was quite a bit smaller than our survey had indicated.

What took us most by surprise, however, was the price of motor vehicles, which fell by 1.8% (-0.15%) in January, whereas we had projected a marginal increase. Vehicle prices have been on the rise in recent months. In the last quarter of 2018, they rose by nearly 6%, owing primarily to the depreciation of the ISK.


Outlook broadly unchanged for the months to come

We expect the CPI to rise by 0.6% in February, 0.4% in March, and 0.2% in April. According to these projections, inflation will measure 3.4% in April 2019.


In February and March, the effects of winter sales will subside, with the associated upward pressure on the CPI. Airfares will presumably keep falling in February, as they have in the past few years. Imported inflation due to rising goods prices should also taper off as the summer approaches, provided that the króna does not weaken again. We also expect a modest rise in house prices each month.

The composition of inflation has changed markedly in the past year. At the beginning of 2018, the housing component was the main driver of inflation, while imported goods prices lowered the CPI by approximately 1%. Based on the January 2019 CPI measurement, however, imported goods (excluding petrol) raised the index by 0.9%, and the housing component accounted for 1.4% of the total 3.4% rate of inflation. The depreciation of the ISK in autumn 2018 explains rising imported goods prices, yet it seems that prices have risen rather modestly in view of exchange rate movements thus far.