Iceland’s Economic Outlook “Improving,” Despite Rising Inflation

Bjarni Benediktsson icelandic politics

The annual inflation rate hit 6.7% this morning. It hasn’t been higher since May 2010. In a press conference today, introducing the government’s fiscal plan, Finance Minister Bjarni Benediktsson maintained that the economic outlook was “improving.”

Housing, gas, and clothing driving inflation

According to data published on the website of Statistics Iceland this morning, the annual inflation rate in Iceland has hit a near 12-year high: 6.7% – an increase of almost a percentage point (0.94%) since last month.

The biggest driver for this recent increase has been a rise in the price of housing, gas, and clothing. The price of oil and gas rose by 8.2%, the cost of housing by 2%, and the price of clothing and footwear by 5.3%.

As noted by RÚV, the inflation rate has seen a sharp increase over the past few months. The annual inflation rate was 4.3% in August of last year, and it has risen steadily since then. The first three months of this year have seen the steepest increase, or ca. half a percentage point from December.

The inflation rate has exceeded the Central Bank’s target rates (2.5%) for almost two years, RÚV notes.

Fiscal plan introduced today

Finance Minister Bjarni Benediktsson introduced the government’s fiscal plan today.

“We’re exiting a deep economic depression, in which we employed the state finances to safeguard households and companies … we’ve been protecting our public services and ensuring that we’re prepared to recover when the effects of the pandemic began to subside. I think we’ve been very successful in this regard,” Bjarni stated.

A press release on the fiscal plan echoes the Finance Minister’s statement, stating that “the financial standing of households and companies is strong,” and that the government’s debt prospects have “improved considerably:”

“The government is hopeful that a moderate increase in outlays and continued growth within expanding export industries” will provide “an opportunity to strengthen the (economic) base again and work towards building an even more robust society.”

A few key figures from the press release on the new policy:

  1. The unemployment rate peaked in January 2021 (11.6%). Since then, unemployment has declined steadily, currently sitting at 5.2%, which “is similar to pre-pandemic rates.” The government expects the unemployment rate to fall to 4% during the years that the plan is applicable.
  2. With reference to the Harmonised Index of Consumer Prices, the press release states that although inflation is high, it is lower in Iceland when compared to other European countries. The inflation rate in Iceland, according to the HICP, is 4.4%, compared to the average of 6.2% in Europe. The government hopes to lower the inflation rate with “responsible fiscal management.”
  3. Approximately 7,000 people purchased their first home in 2021, a record number since measurements began. According to the government, the “percentage of households in arrears hit an all-time low in 2021, or 0.9% at the end of the final quarter.”

Matters of emphasis

As noted in the above-mentioned press release, the government will be emphasising several issues in its fiscal plan, among them mental health. The policy area will receive a permanent increase of ISK 500 million ($3.9 million / €3.5 million) in 2023, and an additional increase of ISK 100 million ($800,000 / €700,000) each year for the following two years.

Other notable issues that the government will be emphasising in its policy are investments in research and innovation (ISK 25 billion); combatting the long-term social and health-related effects of the pandemic (ISK 3 billion); and defence and cyber security (ISK 2.2 billion).

2.6% of government spending will be allocated to environmental issues. There was no mention of a national stadium in the fiscal plan.

The fiscal plan will be in effect for the years 2023-2027.


This article was updated at 12:48 PM.