Inflation rose slightly in July, measuring 5.3%. This is the final inflation measurement before the Monetary Policy Committee's interest rate decision on 19 August and we expect the MPC to raise interest rates again at that meeting. Inflation remains highly persistent at present. We expect inflation to remain unchanged in August and to rise slightly in September. Higher global oil prices, rising airfares, hikes in tuition fees at the University of Iceland and higher payments for primary healthcare visits are among the factors expected to contribute most to keeping inflation elevated over the coming months.
At the same time, the economy is showing signs of cooling. Unemployment stood at 4.0% in June, 0.6 percentage points higher than a year earlier, continuing a pattern that has been emerging in recent months. House prices were virtually unchanged month-on-month in July and real house prices have now declined between years for eight consecutive months. The supply of homes for sale is currently high, while the number of purchase agreements is low for this time of year.
Tourist arrivals in June were 4.8% lower than in the same month last year, bringing the cumulative decline since the beginning of the year to 0.9%. Nevertheless, there are reasons to expect the trend to reverse as the summer progresses, not least because of the solar eclipse in August.
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