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Inflation Rate Continues to Climb, Peak Expected in June

The annual inflation rate hit 7.2% yesterday, a 12-year high. Analysts at Íslandsbanki bank predict that the inflation rate will peak in June at 7.7%.

Rising every month since August

Statistics Iceland updated its consumer price index (a proxy for inflation) yesterday. The latest figures indicate that the annual inflation rate has hit a 12-year high, or 7.2%, with the CPI having risen every month since last August.

As noted by RÚV, the consumer price index increased by 1.25% last month: the largest one-month increase since February of 2013.

The biggest driver for this increase is a 2.4% rise in the price of housing and utilities, the single most significant category in the calculation of the CPI (29.3% of total weight), accounting for a rise of 0.45%.

“Housing and utilities are by far the most important driver of inflation in Iceland, first and foremost rent (cost of housing),” Erna Björg Sverrisdóttir, Chief Economist at Arion Bank, stated in an interview with yesterday.

“Of course, the war in Ukraine is beginning to affect inflation,” she continued. “We’ve seen gas prices rise and the price of imported goods, as well. This trend, the gradual increase in inflation among our main trading partners, had begun before the war, but the war has exacerbated these effects,”

(As noted by Kjarninn, the CPI would be approximately 3% lower if housing and utilities had remained unchanged over the past 12 months.)

Another increase that affected the CPI was a rise in the cost of food and non-alcoholic beverages, which increased by 1.4% between months. (Food and non-alcoholic beverages account for 14.7% of the CPI’s total weight).

The rise in the cost of dairy products also contributed to inflation, raising the consumer price index by 0.2%. Airfares likewise increased by 22.9%, causing a 0.37% rise in the index.

Inflation exceeding the Central Bank’s forecast

The current inflation rate exceeds predictions made by the Central Bank: In early February, the Central Bank forecast an annual inflation rate of 5.8% during the first quarter of 2022 and 5.6% during the second quarter. The forecast was, however, published before the Russian invasion of Ukraine, which has resulted in various increases within the international market.

Only 15 days have passed since Landsbanki bank predicted that the inflation rate would peak in June at 7%. Íslandsbanki bank predicts that the inflation rate will peak in June at 7.7%.

Finance Minister Bjarni Benediktsson stated that Iceland’s economic outlook was “improving,” despite rising inflation.

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