Inflation measured 5.2% in June - we had forecast unchanged inflation at 5.1%. The difference is explained almost entirely by the fact that international airfares increased significantly more than we had expected. International airfares are now 28% higher than they were a year ago. Signs of cooling economic activity and weakening demand are despite this becoming increasingly evident in the inflation data. The weight of most components in annualised inflation has contracted somewhat from the beginning of the year yet sharp increases in fuel prices and airfares prevent inflation from declining more – it appears rather sticky at around 5.2%.
The main source of uncertainty for the inflation outlook going forward is the development of oil prices. There was positive news around the middle of last month when the parties to the Persian Gulf conflict signed a declaration of intent to halt hostilities and begin further negotiations. As a result, the global market price of Brent oil temporarily fell below USD 72 per barrel, after having peaked at around USD 120 per barrel following the outbreak of the conflict.
The Monetary Policy Committee of the Central Bank of Iceland meets next month to decide on interest rates. By then, the MPC will have one additional inflation measurement available, the July data. The previous policy decision was announced the day after figures were released showing a sharp contraction in payment card turnover, which likely influenced the MPC's decision to raise interest rates by 0.25 percentage points rather than 0.5 percentage points. Last month, however, those figures were revised and now indicate a more modest contraction. This suggests that domestic consumption growth is slowing, which is good news for inflation, although not as rapidly as the card transaction data initially indicated.
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