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Icelandic economy red hot

Unemployment measured in at 2% in July and has not been as low since December 2001 reports the Icelandic Broadcasting Service. The banks predict unemployment will go below 2% followed by expansion and inflation.

Björn Rúnar Gudmundsson, an economist with Landsbanki, says the national labor market is very tight and that this indicates that inflation will be higher in Iceland than in its neighboring countries. He says that it is never bad to have low unemployment, it is better to have work than no work. But he points out that lower unemployment increases the risk of expansion on the labor market.

The banks predict continued expansion. Inflation will then erode increased purchasing power, which has increased by 3% last year. Salaries have increased 6.8% in the general labor market and 6.1% in government sectors. Over the same 12 month time frame inflation was 3.5% resulting in a total of 3.1% increase in purchasing power for the year.

Banks point to the fact that higher housing prices effect inflation, without the recent price hikes inflation would be at 1%. The banks predict increased housing prices to the end the year, but prices will stabilize next year and then decrease depending on location and housing.

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