Inflation Rate Now 10%, Up 1.39% From January

inflation rate in iceland

Inflation rates in Iceland continue to rise, with the latest figures from Statistics Iceland indicating that inflation now rests at 10%.

The Consumer Price Index, reported every month by Statistics Iceland, shows that February 2023 reached a level of 577.3 (where May 1988 = 100), a 1.39% increase from January.

Read more: Inflation Rate Continues to Climb (January 2023)

When housing prices are not accounted for, the CPI saw a month-on-month increase of 1.81%, indicating a slow in the housing market, and that private consumption has been the main driver in the increase.

Prices of food and non-alcoholic beverages saw an increase of 1.9)%, while prices of clothing increased by 6.8%. Furniture and other household goods were most affected, at 8.7%.

inflation rate iceland february 2023
Statistics Iceland

The Consumer Price Index is compiled monthly. In addition to serving as an important indicator of consumer spending and inflation, it is also used to determine rates for inflation-indexed mortgages.

The 10% marker is also notable, as this is the first time inflation has exceeded 10% since 2009.

The high rate of inflation has also impacted the ongoing wage negotiations in Iceland, which have been sharpened given the increasing cost of living.

 

Inflation Rate Continues Climb, Now at 9.9%

currency iceland

The latest indicators from Statistics Iceland show a month-by-month increase in the Consumer Price Index of 0.85%.

Inflation now rests at 9.9%, where it last sat in July 2022. Inflation rates saw slight decreases in the fall of 2022, but continued to rise throughout the winter.

See also: September Inflation Drops to 9.3%

Consumers in Iceland have especially felt the effect of inflation on food prices, with staples like milk, eggs, and cheese being especially affected at 4.4%.

Other consumer goods affected include alcohol (5,5%), tobacco (5.5%), and new vehicles (9.8%).

consumer price index iceland
Statistics Iceland

However, Statistics Iceland points out that many clearance sales after the holiday season have driven down the cost of some consumer goods in Iceland, such as clothing (-8.4%) and household appliances (-6.2%). Airfares have likewise decreased by around 9%.

With Efling trade union still in negotiations, read more about how interest rates could affect contract re-negotiations.

Deep North Episode 6: Indexed Mortgages

indexed loan iceland

In the tug-of-war game between interest rates and inflation following the economic disruptions of COVID-19, Icelandic homeowners have been put under increasing pressure. We talk about a rather unique feature of the Icelandic financial system and its effects on Icelandic families.

Read more about indexed loans in our recent In Focus piece.

Government Announces Increased Child and Housing Benefits

katrin jakobsdottir prime minister iceland

In the wake of the recently-concluded contract negotiations between VR and SA, the government has announced a series of measures aimed at supporting low- and middle-income households.

At a press conference at 14:30 today, Prime Minister Katrín Jakobsdóttir, alongside Minister of Finance Bjarni Benediktsson and Minister of Infrastructure Sigurður Ingi Jóhannsson, announced the new policies, which aim to support the buying-power of households, while keeping inflation rates down.

Improved Child Benefits

The child benefit system is to be simplified, while also increasing support for the system, allowing more to qualify for child benefits.

The improved child benefits will represent a total increase of ISK 5 billion from the current system over the next two years. Additionally, the system is to be streamlined to reduce the waiting time for child benefits, which are not to exceed four months after the birth of a child.

Changes in Housing

The government also plans to increase the housing supply by incentivizing the development of new real estate throughout the nation.

Increased access to social housing will also be a priority, with some ISK 4 billion to be allotted in 2023 to the expansion of affordable housing in Iceland.

Housing benefits for tenants will also be increased.

Additional reforms include improved pensions for the elderly and disabled, increased funding for workplace training, and reforms to pension funds.

Bundled along these concessions to Iceland’s cost-of-living crisis will also be a large increase to police funding.

Read the full announcement here.

In Focus: Indexed Mortgages

indexed mortgage iceland

Iceland’s housing market has undergone rapid changes over the past two years, with prices shooting upward. The market has begun to gradually cool, as a result of rising interest rates, with prices stalling or even slightly lowering in some cases. While there are multiple factors that affect housing prices – including availability and a pandemic-inspired […]

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Rising Interest Rates Complicate Upcoming Wage Negotiations

central bank iceland

The recent hike in interest rates has complicated the upcoming wage negotiations, with government involvement now a possibility to bring the negotiations to a conclusion.

Now, Prime Minister Katrín Jakobsdóttir has invited leaders from both sides of the bargaining table to a meeting to find a path forward.

This fall, around 1/3 of labour contracts are expiring and need to be renegotiated. Matters have been further complicated by turmoil at the 45th ASÍ congress (The Icelandic Federation of Labour, Iceland’s largest federation of trade unions), which have left the leadership of this organisation unclear. Individual unions have begun renegotiating their contracts, mostly with SA (The Confederation of Icelandic Employers).

Read more: Interest Rates Continue to Increase

Recent increases to the interest rate in Iceland have complicated negotiations, with talks with VR and several other unions and SA breaking down yesterday. The rate increases came in the wake of inflation numbers for October being higher than expected. The 0.25% increase to 6% interest (seven-day term deposit rate) is intended to bring inflation back into an acceptable range. Ásgeir Jónsson, Governor of the Central Bank of Iceland, has previously called on the labour market to help in the fight against inflation, as wage demands at the bargaining table could have an exacerbating effect on inflation.

Alongside the rate increases, the Central Bank of Iceland’s Monetary Policy Committee released a statement that inflation forecasts could turn out to be too optimistic if the ongoing wage negotiations lead to wages rising in excess of the Central Bank’s predictions. Consumer spending in September and October has proved higher than expected, and some fear that wage demands may drive up consumer spending and therefore prices.

Vísir quotes Ásgeir as stating “Our task is to ensure price stability and we believe by doing this, we are supporting the wage negotiations. It would be futile to negotiate such wage increases only to have them burn up in inflation. The Central Bank is therefore of the opinion that it is contributing to the process by ensuring this does not happen.”

Finance Minister Bjarni Benediktsson stated regarding the rate hikes that although the increase had been a “splash of cold water” for many, it nevertheless sent “a necessary message to leaders in the labour market.”

The Central Bank of Iceland’s Monetary Policy Committee has a set inflation target of 2.5%. Inflation currently sits at 9.4%.

iceland interest rate
Interest Rates – From Central Bank of Iceland

The rate hike has, however, drawn critique from both sides of the bargaining table.

Ragnar Þór Ingólfsson, the chairperson of VR trade union, said that because of this, the negotiations between VR and SA will be terminated and, as a result, harsh measures will have to be taken. Halldór Benjamín Þorbergsson, director of SA, also said he disagreed with the Central Bank’s interest rate decision. The decision, according to Halldór, put the wage negotiations in “upheaval” and the bank’s credibility has been “damaged” by this interest rate increase.

Prime Minister Katrín Jakobsdóttir has stated that the government supports a quick conclusion to the negotiations, suggesting the possibility of shorter-term contracts as a solution: “I think that all parties understand that events have not been particularly favourable for us. First an epidemic, then a war, inflation and the consequences of Russia’s war in Ukraine. So, of course, we all realize that there is considerable uncertainty, which may make a short-term contract a more viable option. But it is of course entirely in the hands of those sitting at the negotiating table to make that decision.”

Katrín continued, saying that it would be bad for all parties involved if negotiations were to break down: “Of course that would be bad. It is in the interest of all in our society that there is peace in the labour market. That workers can live on their wages. That business can continue. It’s in all of our interests.”

 

Latest from Central Bank: Interest Rates to Increase 0.25%, Now Resting at 6%

inflation rate iceland

The Monetary Policy Committee of the Central Bank of Iceland has announced today that key interest rates will be raised an additional 0.25%, with short-term interest rates (seven day term deposits), now sitting at 6%.

Read more: Key Interest Rates Increased 0.25%

The increase in interest rate comes in response to October inflation, which rose slightly to 9.4% from September’s level of 9.3%. Previous raises to the interest rate were introduced in order to cool the market and fight inflation, but have not had the entire effect hoped for.

Interest rates in Iceland now rest at:

  • Overnight loans 7.75%
  • Seven-day collateralised loans 6.75%
  • Seven-day term deposits 6.00%
  • Current accounts 5.75%

With the Central Bank’s aim of stabilising prices, it has noted that price increases continue to be widespread, but that they hope to reduce inflation to 4.5% by the end of 2023.

Read more: September Inflation Rate Drops

In the Central Bank report, it is stated that the Icelandic króna has seen a depreciation since October, and that inflation rates in the bond market have also risen since last month.

With the new measures in place, the Central Bank reports an improved economic outlook for 2023, with an expected 2.8% growth in GDP, up from its previous estimate of 1.9%.  This growth is accounted for by higher levels of domestic demand than previously forecast.

The Central Bank has also stressed the importance of developments in the labour market in bringing inflation back to acceptable levels, a reference to the previously postponed and now upcoming wage negotiations between many of Iceland’s largest trade unions and SA, the Confederation of Icelandic Employers.

 

Inflation Rate Drops to 9.3%

inflation rate iceland

The latest numbers from Statistics Iceland indicate a moderate decrease in the rate of inflation, with the 12-month figure being calculated as 9.3% in September.

The data from Statistics Iceland below shows monthly and yearly fluctuations in the consumer price index, with July’s level of 9.9% representing a likely maximum.

In the data from Statistics Iceland, it is noted that the price of clothes and shoes have risen by some 4.6%, and household electronics by 5.4%. Airfares have been a notable exception, decreasing by 17.9%.

Given rising interest rates and the importance of the housing market in driving inflation, inflation rates are expected to slowly decrease for the remainder of 2022.

This trend is likely reinforced by the housing market, which has shown signs of slowing recently.

inflation rate iceland
Statistics Iceland / Hagstofa Íslands

A statement from the Central Bank today notes that inflation among Iceland’s trading partners has not been higher in decades and that these international trends may also have a negative impact on Iceland.

Read more: Signs Inflation May Have Peaked in Iceland

Nevertheless, the Central Bank stresses that “the resilience of the systemically important banks is high. Their capital and liquidity position is strong. The Central Bank of Iceland’s stress test for 2022 shows that the banks have the ability to respond to external shocks and at the same time support households and businesses.”

The statement continues: “Increased external uncertainty underlines the importance of maintaining the resilience of the Icelandic financial system. The situation in this country is better than in our trading partners, but full vigilance must be maintained in order to preserve financial stability.”

Up until now, the countercyclical capital buffer (CCyB), the amount of liquid capital a financial institution holds in case of stress, has remained unchanged. As of tomorrow, September 29, the CCyB will be increased by 2%, in the event that more credit needs to be provided to the economy in the event of a downturn.