Despite the consumer price index increasing by 0.59% month-on-month, the annual inflation rate has decreased to 9.8% (down from 10.2% in February). The Finance Minister is hopeful that inflation has peaked. An economist with Landsbanki bank has stated that inflationary pressures remain high.
Inflation dips below 10%
Yesterday, the Central Bank published new figures on inflation on its website. According to the data, the annual inflation rate currently sits at 9.8%, down from 10.2% in February. This decline in inflation – which is commonly measured as the 12-month change in the consumer price index (CPI) – comes despite the CPI rising by 0.59% month-on-month in March. The increase in the CPI is to be explained by a 0.7% increase in food and beverage prices, a 4.3% increase in clothing and footwear, and a 0.8% increase in housing costs.
In an interview with RÚV, Una Jónsdóttir, Chief Economist with the Landsbanki bank, stated that the price reduction of furniture, household appliances, and similar products – which fell by 1.7%. – was the main reason why the annual inflation rate was subsiding.
“If, basically, the price of all volatile items used to calculate inflation are removed from the equation, then inflation actually increased month-on-month. So although it’s certainly positive to see inflation abate a little, it, nonetheless, remains very high. And the underlying pressures are still considerable.”
Una observed that it was hard to say whether this marked the beginning of a decline in inflation: “The new figures certainly support that, but how confident we are in it remains to be seen. The fact that we see underlying inflation increasing is not necessarily a positive sign.”
There are, however, several indications that inflationary pressures are slowly easing. Housing prices, for example, no longer create as much inflationary pressure, given that real-estate prices outside the capital area have fallen. The price of clothes and shoes, however, is now 2% higher than it was before these items went on sale. As noted by RÚV, there are many factors responsible for the current price increases: demand pressure, external price increases, and wage increases. The exchange rate has also not strengthened as expected.
Una concluded by saying that it was unlikely that the Central Bank’s latest rate hike had begun to have an effect: “We saw the inflation pressure decrease on the bond market. When the expectation is, going forward, that inflation will decline, it often serves as a kind of self-fulfilling prophecy.”
Finance Minister cautiously optimistic
Following a cabinet meeting yesterday, Finance Minister Bjarni Benediktsson was asked about the slight decline in the annual inflation rate.
“I think it’s best to hold back with the big statements,” Bjarni told Vísir. “But, on its own, this is a positive development, and hopefully, it’s an indication that inflation has peaked. We have seen large interest rate increases from the Central Bank, and the government finances this year are supporting lower inflation – we see it in a very large change in the performance of the treasury.”
Bjarni noted that the government would continue to take measures that would contribute to lowering the costs of goods and services – which was no small task: “When people have lost control of inflation expectations going into the future, to rebuild the belief that we can tackle this task and be successful – that’s what we’re focused on doing.”
The government’s new fiscal policy for the years 2023-2027 is to be presented today. Bjarni observed that the new policy would differ in its emphasis from the last. The new policy would take into account changes in external conditions.
“There are certain priorities from the government that need to take precedence, and by that, I mean inflation, in particular. So I think that the new fiscal policy will be an important contribution to this situation, and I am happy that, all in all, we can have a lot of faith in the future; it can be bright going forward in Iceland.”