CPI to rise 0.6% in February

We project that the consumer price index (CPI) will rise by 0.6% month-on-month in February, leaving headline inflation unchanged at 3.4%.  The short-term inflation outlook has changed very little since our last forecast.  The outlook is for inflation to average 3.4% in Q1/2019 and 3.6% in 2019 as a whole before tapering off to an average of 3.4% in 2020. Statistics Iceland (SI) will publish the February CPI at 9:00 hrs. on 27 February.

End-of-sale effects and house prices the main upward-pushing items

In February, the end of seasonal sales is always a major factor in month-on-month CPI movements. We assume that end-of-sale effects will raise the index by a total of nearly 0.4% this time. Of that amount, 0.17% is due to clothing and footwear, 0.19% to furniture and housewares, and 0.02% to computers, televisions, and the like.

Apart from the conclusion of winter sales, we expect the rise in imputed to raise the index by 0.10%, as our survey suggests that house prices rose nearly 0.5% between months.  This month’s rise in food prices appears to be modest (0.03% CPI effect).
The main downward-pushing item in the February forecast is international airfares (-0.04% CPI effect).

Inflation to subside further ahead

The outlook is for inflation to remain roughly at the current level in the next few months. We expect the CPI to rise by 0.5% in March, 0.2% in April, and 0.2% in May,  leaving headline inflation at 3.8% in May.  In March, the effects of winter sales will subside, with the associated upward pressure on the CPI.  Furthermore, airfares can be expected to rise over the Easter holidays and then retreat again in May. Imported inflation due to rising goods prices should also taper off as the summer approaches, provided that the króna does not weaken again. We expect house prices to rise quite a bit more slowly in coming months than they did, on average, in 2018.

Thereafter, we expect inflation to pick up over the course of 2019, peaking at 3.9% in Q3, and then taper off steadily. We expect it to measure 3.4% at the end of 2019 and to average 3.4% in 2020.  According to this, it will remain just below the 4% upper deviation threshold of the Central Bank’s inflation target, although a return to the 2.5% target will apparently take a while. 

As before, the upcoming wage settlements are one of the principal uncertainties in the forecast. We expect wages to rise slightly more, on average, in 2019 than they did in 2018, although there is a significant risk that pay hikes will be larger than we project, or that other terms of the wage bargaining pertaining to the public sector could exacerbate inflationary pressures further ahead.

In addition, we assume that house price inflation will ease as the forecast horizon progresses and that the ISK exchange rate will hold broadly unchanged at the level seen in recent weeks.  In our opinion, the uncertainty about exchange rate developments is largely symmetric, as the exchange rate appears close to its equilibrium, at least in the short run.

Inflation forecast