Inflation bounded up in January, rising from 4.5% to 5.2%. The increase in inflation is mainly explained by higher public levies related to motor vehicles. The price of new cars rose and a per-kilometre charge was introduced, while petrol and diesel prices fell at the same time. Combined, these changes pushed the index upward by 0.6%. The measurement also indicates that underlying price pressures are still present, with the food basket increasing somewhat more than we had expected.
The January inflation figure significantly reduces the likelihood that the Monetary Policy Committee (MPC) will keep interest rates unchanged in February. In fact, we expect the MPC to raise interest rates by 0.25 percentage points. Our main assumptions are that inflation will remain around 5% in the coming months, inflation expectations have not been brought down, and rising purchasing power continues to manifest in increased consumption.
There are clear signs that tensions in the labour market are easing. Unemployment is rising and demand for labour continues to decline. Despite this, Icelandic wanderlust is at an all-time high. Icelanders have never taken as many trips abroad as they did last year and, despite the collapse of Play in October, international travel by Icelanders in the final quarter of the year has not been higher since 2018. Overall, households in the country are in a strong position. Savings in deposit accounts are increasing and there are no signs of rising arrears.
The housing market has cooled in recent months. Nominal housing prices have increased by 2.1% over the past twelve months, well below general inflation, meaning that real house prices have declined year-on-year in the past two months. Lower activity was observed following Supreme Court rulings on interest rates, which temporarily created greater uncertainty and constrained credit supply. Although that uncertainty is no longer present, access to credit remains lower than before the ruling.
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