Inflation in Iceland Declining

Finances in Iceland

In news that will likely come as a relief to locals and visitors alike, RÚV reports that inflation has been declining in Iceland.

Still higher than the EEA

That said, inflation in Iceland is still comparatively high, at least within the context of the rest of the European Economic Area (EEA). Whereas inflation in the EEA last month was at 2.6%, in Iceland it was 5.1%

Iceland is not, however, the country with the highest inflation rate in Europe; that distinction goes to Turkey, with a January 2024 inflation rate of 64.9%.

Inflation decreasing

While 5.1% may not be ideal, inflation in Iceland has been trending downward. In February of last year, it was at 8.8%, and in October 2022, 11.5%.

All this being the case, the consumer price index is also trending downwards, boding especially well for Icelandic residents in the wake of recent collective bargaining negotiations.

More Icelanders Seek Help of Financial Advisers Than Before

Finances in Iceland

More people in Iceland seek the help of financial advisors than before, RÚV reports today. The number of couples experiencing financial difficulties is especially increasing. Ásta Sigrún Helgadóttir from the organisation Debtors’ Ombudsman (Umboðsmaður skuldara) blames high-interest rates and inflation for the current difficult financial situations of many residents. 

Inflation fuels difficult financial situations

The Debtors’ Ombudsman is a governmental institution founded in 2010 in the aftermath of the financial crisis. It operates under the guidance of the Minister of Social Affairs and focuses on improving and protecting the position of individuals in debt.

Currently, the head of the institution, Ásta Sigrún Helgadóttir, is witnessing an increase in applications for financial advice. In the December report of the Central Bank’s Financial Stability Committee, it was stated that arrears (part of a debt that is overdue) have not increased significantly despite increased inflation, higher interest rates and a heavier debt burden. Currently, inflation in Iceland stands at 6.6%, the lowest rate since February 2022.

More relief for debtors coming in April

Ásta emphasises that a lot of additional financial issues can be hidden from those reports, such as overdrafts and consumer loans. According to the institution, the socio-demographic group of the applicants is also changing. Until last year, the majority of applicants seeking help were individuals, while currently, an increased amount of couples also seek financial advise. This year, the majority of applicants are employed and on the rental market, though the amount of homeowners seeking aid also increased over the years. 

Changes in the Payment Adjustment Act will take effect on April 1. These modifications, which have just been approved by the Icelandic Parliament, will make payment relief for debtors clearer and more efficient. 

The changes include that more people will be able to apply for payment relief through the Debtor’s Ombudsman. Additionally, new rules regarding payment deadlines will be installed, and temporarily lower monthly mortgage payments will be made possible. People with student loans who were initially exempt from the Act are now also covered.

Another Collective Bargaining Agreement Signed

A new collective bargaining agreement was signed yesterday, Vísir reports, between the Confederation of Icelandic Enterprise (SA) and the labour unions The Electrical Industry Association of Iceland, the food and restaurant union Matvís, the Icelandic Union of Marine Engineers and Metal Technicians, and the printers’ union Grafía.

Stability and gratitude

The contract worked out between the parties is to last four years, and outlines terms similar to the agreement recently approved by the labour union Efling and others last week.

SA director Sigríður Margrét Oddsdóttir told reporters that the aim of the agreement was for “economic stability”, adding, “We are just incredibly proud and grateful after the day today.”

Ball in their court

Kristján Þórður Snæbjarnarson, the director of the The Electrical Industry Association of Iceland, was more guarded in his response to the contract.

While saying that it was indeed good news that their workers had gotten new wage agreements, a pay rise is not the only thing that affects economic stability and keeping up with the cost of living.

“It is also extremely important that interest rates and inflation reduce,” he told reporters, adding, “The ball is in the court of the Central Bank, companies in this country, and state and local authorities to hold back on tariffs and participate in this project with us. That, of course, is what matters. We send the ball their way.”

More negotiations to come

The next major round of labour negotiations is to take place between SA and VR, which is the labour union of employees in commerce, services and offices.

Talks between SA and VR have been contentious, and were recently broken off, but talks between the two parties are set to resume tomorrow.

Inflation Rate in Iceland Decreases to Two-Year Low

money

Inflation in Iceland slightly decreased to 6.6%, the lowest rate since February 2022, although it is still significantly higher than the target set by the Central Bank. The decrease fell short of analysts’ expectations, with the winding down of winter sales impacting prices of clothing, shoes, and furniture.

Four percentage points over the target

Inflation slightly decreased month-over-month and is currently being measured at 6.6%, RÚV reports. This marks the lowest inflation rate recorded in Iceland since February 2022 despite remaining over four percentage points above the Central Bank’s inflation target.

As noted by RÚV, the current measurement represents the third consecutive decrease in inflation, although the reduction was less than what bank analysis departments had predicted; Íslandsbanki and Landsbankinn had forecasted inflation to be at 6.1%, half a percentage point lower than the actual level of inflation.

Winter sales coming to an end have contributed to inflationary pressures. Prices for clothing and shoes increased by 8.4%, and furniture prices by 5.5%. Excluding housing prices, inflation would stand at 4.7%.

According to the harmonised index of consumer prices for the European Economic Area published by Statistics Iceland on Monday, inflation has risen by 5.6% over one year domestically, with only Serbia, Romania, and Turkey – where inflations stand at 64.9% – recording higher rates.

The average inflation rate across the EEA is 3.1%, with the lowest rates observed in Denmark and Italy at 0.9%.

Inflation refers to the rate at which the general level of prices for goods and services is rising and, subsequently, purchasing power is falling.

Union Leader Allays Strike Fears

ASÍ President Finnbjörn A. Hermannsson

Strikes are an unlikely outcome in the current labour dispute between unions and employers, President of the Icelandic Confederation of Labour (ASÍ) Finnbjörn A. Hermannsson told RÚV today. He expects parties to reconvene for further discussions, as the sides are close to agreement on major issues.

Strikes up to individual unions

On Friday, the coalition of unions ended its negotiations with the Confederation of Icelandic Enterprise (SA) on a new collective bargaining agreement. Despite an agreement on modest salary increases being reached in principle, the coalition had hoped to include a clause in the four-year deal to protect workers from downside risks if inflation and interest rate targets were not met.

Finnbjörn says that although the unions involved are members of ASÍ, an umbrella organisation of trade unions, the unions would have to individually decide whether to strike or not. Ragnar Þór Ingólfsson, president of the union VR, had previously said that he did not rule out industrial action to bring about a new agreement.

“The members of the coalition will confere and what they do will be their decision,” Finnbjörn said. “But I expect people to come back to the table and pick up from where they left off.”

Further negotiations upcoming

Finnbjörn added that both parties were focused on bringing down inflation and that an agreement on salaries was near at hand. “And usually when talks fall apart, it is because of the salary issue, not clauses on economic targets. That’s why I expect the parties to come back together and exhaust all avenues before they turn to industrial action,” Finnbjörn said.

Further wage negotiations are coming up for unions in the public sector. Finnbjörn said that informal discussions have begun and that he was optimistic for a good result and positive economic developments in the near future.

Wage Negotiations Halted

Sólveig Anna Jónsdóttir

The coalition of unions has ended its negotiations with the Confederation of Icelandic Enterprise (SA) on a new collective bargaining agreement. The coalition claims that negotiations were not moving forward, Vísir reports.

Disagreement on economic targets

In a press release, the coalition claims that a clause on the development of inflation and interest rates became the point of contention. The coalition hoped to include a clause in the four-year deal to protect workers from downside risks if inflation and interest rate targets were not met.

“The coalition is deeply disappointed by SA choosing to derail negotiations because of this clause,” the release said. “It’s especially regrettable, since both parties have worked hard to reach an agreement on modest salary increases and an agreement on salaries had already been reached in principle. The signing of new agreement was within our grasp.”

The coalition claims that all long-term agreements in recent decades have included a clause such as the one in dispute. “This would mean that workers alone would carry the risks if the targets aren’t reached. It is strange that SA is not ready to cement in a long-term agreement the goals they have often claimed are most important to them: lowering inflation and interest rates.”

Government benefit increases discussed

Negotiations have been ongoing for weeks, with parties also conferring with government ministers. The unions have called for increased government spending on child and housing benefits in exchange for modest salary increases. “We’ve been able to deepen the conversation on possible scenarios and how the government can be involved,” said Prime Minister Katrín Jakobsdóttir after a meeting with union coalition on Thursday. “I’ve repeatedly said that we are willing to back a collective bargaining agreement that supports inflation targets and creates the conditions to lower interest rates. All of us agree on this point.”

2023 in Review: Community

Kvennafrídagurinn - kvenna verkfall Arnarhóll Women's strike

As the year draws to a close, Iceland Review brings you a summary of the biggest stories in community, culture, and nature in 2023. Here are some of the political, economic, and social interest stories that most affected Icelandic communities this year.

 

Wage battle

This year started out tense for the labour movement, with Efling Union and the Confederation of Icelandic Enterprise (SA) in a wage negotiation deadlock. One-third of all labour contracts in Iceland had expired in the fall of 2022, and while most trade unions were able to reach compromises with SA in the form of shorter-term contracts, Efling Union, the country’s second-largest, held out.

In February, Efling workers voted to strike, leading to the temporary closure of several hotels and shortages of fuel at the pumps. At the height of strike actions in late February, some 2,000 Efling members were on strike. SA responded by proposing a lockout against Efling workers, which was approved in a members’ vote on February 22. Such a lockout would affect all members of Efling, around 21,000 in total, neither allowing them to show up to work, receive a wage, or accrue benefits and leave.

On March 1, the lockout was later postponed after temporarily-appointed state mediator Ástráður Haraldsson submitted a mediating proposal to SA and Efling. Efling members then voted in favour of the proposals, bringing months of tension to an end. The approved agreement is only valid until January 2024, however, and negotiations for the next one have not gotten off to a good start.

Read more about the Efling and SA collective agreement negotiations.

 

Police powers

Iceland is regularly ranked as one of the most peaceful places in the world. However, in May 2023, residents of the capital were greeted by rather unusual sights. Police officers armed with submachine guns prowled the streets, helicopters hovered overhead, and surveillance cameras kept their silent watch over downtown. These security measures were due to the Council of Europe Summit in Reykjavík, but not all of them were destined to pack up and leave alongside the private jets of world leaders. It was reported that Icelandic police would keep the additional weapons imported for the summit.

Unfortunately, 2022 proved to be a particularly violent year for Iceland, with a high-profile knife attack in a downtown Reykjavík club, a thwarted domestic terrorism plot, and four homicides (higher than the annual average of two, but not as many as in 2000, when Iceland reported a record six murders). In the wake of this violent year, Justice Minister Jón Gunnarsson declared a “war on organised crime,” the keystone of which is a sweeping package of reforms that includes provisions for increased police funding, pre-emptive search warrants, and better-armed police. For Iceland, a nation where police officers still do not carry firearms on their person, the changes are novel.

They have also not been introduced without pushback. The Icelandic Bar Association submitted many comments on the Justice Minister’s bill that would increase Icelandic police’s powers to monitor people whoa re not suspected of crimes. Later that same month, the Parliamentary Ombudsman published a legal opinion stating that Jón Gunnarsson was guilty of a lack of consultation with the cabinet when he signed an amendment to regulations, authorising Icelandic police to carry electroshock weapons. This issue in particular triggered a failed vote of no confidence in Parliament.

Read more about police powers in Iceland.

 

Regulations on asylum seekers

In the spring of 2023, after several failed attempts and harsh criticism from human rights groups, Iceland’s Parliament passed new legislation that tightens restrictions on asylum seekers. The most significant change is that people whose asylum applications have received a final rejection are now stripped of essential services unless they consent to deportation. As a result, dozens of asylum seekers unable to leave the country for reasons personal or political are being stripped of housing and services, leaving many of them on the streets.

When the legislation took effect, municipal and state authorities could not agree on who was responsible for providing for the group’s basic needs. Now it appears that municipalities will provide basic services to the group, but the state will ultimately foot the bill, in a system more costly to taxpayers than the one it has replaced. Iceland’s Justice Minister Guðrún Hafsteinsdóttir has proposed erecting detention centres for asylum seekers and stated she will introduce a bill to that effect in early 2024.

Icelandic authorities have been criticised for the deportation of many asylum seekers this year as well, and how such deportations have been handled. The country deported 180 Venezuelans back to their home country in November, where they received a cold welcome. A disabled asylum seeker left Iceland with his family this month after a ruling that his family members would be deported.

Read more about the eviction of asylum seekers from state-subsidised housing in Iceland.

 

Bjarni Benediktsson resigns

On October 10, 2023, Finance Minister Bjarni Benediktsson called a snap press conference. The call came on the heels of an opinion authored by the Parliamentary Ombudsman that concluded that the Minister of Finance’s role in the ongoing privatisation of Íslandsbanki bank – which had been nationalised following the 2008 banking collapse – had not conformed to state guidelines.

The official opinion of the Ombudsman stated: “In light of the fact that a company owned by the Finance Minister’s father was among the buyers in the sale of the state’s 22.5% share of the Íslandsbanki bank, sold in March 2022, the Minister was unfit to approve of a proposal made by Icelandic State Financial Investments (ISFI) to go ahead with the sale.”

At the press conference, Bjarni announced his decision to step down as Minister of Finance, despite his “own views, reasons, and understanding” of the Ombudsman’s opinion. Only six ministers have ever resigned from office following criticism or protest since the Republic of Iceland was established in 1944. However, the historic act was somewhat tempered when it was later announced that Bjarni would “switch seats” with Þórdís Kolbrún Reykfjörð Gylfadóttir to become Minister for Foreign Affairs while Þórdís took the position of Finance Minister. Þórdís has announced that she will move forward with selling the remainder of Íslandsbanki.

Read more about Bjarni Benediktsson.

 

Persistent inflation

As elsewhere in the world, 2023 has been marked by persistent inflation and a significant increase in the cost of living in Iceland. In an attempt to curb inflation, the Central Bank of Iceland continued raising interest rates throughout the first three quarters, to a height of 9.25% for the key interest rate. In October and November, however, it decided to keep that rate unchanged, citing economic uncertainty.

In June, Iceland’s government introduced measures to counter inflation, involving a combination of spending cuts and tax increases. The measures have yet to show a significant impact, as inflation remains high. In November, it had measured 8% over the past 12 months and risen by 0.1% in the previous month.

Food prices have risen amid inflation, with the price of perishable good rising 12.2% year over year, significantly above inflation. When the króna appreciated mid-year, the Minister of Culture and Business Affairs sought clarification from major grocery chains on why prices had not fallen. Iceland ranks third globally when terms of food prices, trailing only Norway and Switzerland.

The rising interest rates have significantly impacted the housing market and put many families in a tight spot.

 

Women’s strike draws huge crowds

On October 24, 2023, women and non-binary people in Iceland held a strike in support of gender equality that drew historic crowds. Inspired by the original 1975 “Women’s Day Off,” the aim of the protest was twofold: to call for the eradication of gender-based violence and rectifying the undervaluation of female-dominated professions.

Public gatherings were held across the country, and in Reykjavík the turnout exceeded expectations. Chief Superintendent of Reykjavík Metropolitan Police Ásgeir Þór Ásgeirsson estimated that between 70,000-100,000 people attended the event on Arnarhóll hill in the city centre.

While Women’s Strikes have been held in Iceland from time to time over the last several decades, this event was only the second full-day strike of its kind, the first one being the original historic protest in 1975. This year, even Icelandic Prime Minister Katrín Jakobsdóttir walked off the job and attended the protest. The news about the Women’s Strike in Iceland spread fast around the globe, with international media outlets reporting on the event, including the New York Times, BBC, and the Guardian.

Read more about the 2023 Women’s Strike.

Collective Agreement Negotiations Suspended

vr union iceland, Ragnar Þór Ingólfsson

The labour movement cannot drive down inflation alone, the chairman of Iceland’s largest labour union told Vísir. He says wage negotiations have been put on hold due to announced municipal fee hikes as well as what he calls the government’s inaction. Inflation has measured 8% over the past 12 months in Iceland and rose by 0.1% last month.

The aim of labour and business representatives was to complete a new collective agreement by January 31, when the current short-term agreement expires. It is customary for Icelandic municipalities to announce changes to their fees annually, and these changes normally take effect on January 1. VR Union Chairman Ragnar Þór Ingólfsson says unions will have to re-examine the situation once these fee changes have been confirmed, but say that municipalities have proposed fee hikes between 5-30%.

“It’s just a grave situation,” Ragnar Þór stated. “We are going backwards. The government regarding housing issues, regarding fee hikes. We are seeing the cost of living index rise and prices rise. There is upward pressure everywhere. That all somehow works against a good result being reached in the wage negotiations. So all we can do is wait. We can’t be trying to do something alone on some boat in the middle of the ocean when no one is going to participate.”

Central Bank Keeps Interest Rates Steady Amid Geological Unrest

Central Bank

The Monetary Policy Committee of the Central Bank of Iceland has decided to keep the bank’s interest rates steady at 9.25%, despite worsening inflation expectations and economic tensions. This decision reflects the committee’s caution due to the uncertain economic impact of the geological unrest on the Reykjanes peninsula.

Inflation expectations worsened

In a statement issued by the Monetary Policy Committee of the Central Bank at 8.30 AM, the committee announced that it would be keeping the bank’s interest rates unchanged at 9.25%.

The statement reveals that inflation slightly decreased month-over-month in October, registering at 7.9%. Underlying inflation also showed a decline. There are ongoing indications of a slowdown in private consumption and investment.

“According to the Central Bank’s new forecast, inflation expectations have worsened. The tension in the national economy has proven greater than previously thought, and the value of the krona has decreased. Inflation expectations remain high, and cost increases seem to have a more significant and prolonged impact on inflation than before.”

The announcement goes on to state that even though the effects of interest rate hikes in recent months are becoming more evident, worse inflation prospects suggest that further tightening of monetary policy might be necessary. 

“Despite this, the Monetary Policy Committee has decided to maintain current interest rates for now, given the uncertainty about the economic impact of geological unrest on the Reykjanes peninsula. The future monetary policy will continue to be shaped by the development of economic conditions, inflation, and inflation expectations.” 

The interest rates will be as follows:

  1. Overnight loans: 11.0%
  2. Seven-day collateralized loans: 10.0%
  3. Seven-day term deposits: 9.25%
  4. Current accounts: 9.0%

Inflation Erodes Real Value of Apartments in Capital Region

Reykjavík old historic centre

The housing market experienced a decline in transactions in July, with a notable drop in new apartments entering the market in August. Despite stable nominal apartment prices, inflation and other factors have led to a decrease in the real value of housing, especially in the capital region, Vísir reports.

Housing market sees a decline in transactions

In July, there was a decrease in residential property agreements from June, dropping from 709 to 615. On average, for the current year, there have been 614 agreements made each month, compared to an average of 825 agreements per month for the first seven months of the previous year.

This data is highlighted in the latest monthly report from the Housing and Construction Authority.

Real value of housing declines

While the nominal value of apartment prices has remained stable, the housing price index in the capital region increased by 0.7% in August. Over the past twelve months, apartment prices in the capital area have risen by 2%, resulting in a real price decrease of 5.3% (assuming that the inflation rate was 7.3% over the past 12 months). The inflation rate in Iceland was measured at 7.7% in August.

In the neighbouring municipalities of the capital region, prices decreased by 1.4% month-over-month, and in other parts of the country, they dropped by 1%. The real price of apartments has decreased by 5.8% in the vicinity of the capital region over the last twelve months but increased by 0.2% in other parts of the country.

Significant drop in new apartments entering the market

In August, 240 newly built apartments were introduced to the national market, a stark contrast to the 398 in July, marking a 39.7% decrease month-over-month. In total, 2,276 new apartments have been listed this year, as per the report.

Currently, approximately 3,200 apartments are available for sale nationwide, with 1,907 located in the capital region. Of these, 622 are brand new.

“In the areas surrounding the capital, 691 apartments are up for sale, 239 of which are new, accounting for about 35% of all available apartments. Elsewhere in the country, 568 apartments are on the market, with 73 being new, representing around 13% of all listed properties.”

A growing population

The report also briefly touches upon population growth, suggesting that if the current trend continues, the nation’s population might reach 400,000 by year-end. This growth will necessitate more housing.

“Last year, nearly 3,000 new apartments were listed during the same period, while the population increased by 11,510 individuals. The average household size in Iceland over the past decade has been 2.53 residents per apartment. However, it’s worth noting that this size varies by region and settlement. Based on this average, over 4,500 new apartments would have been needed last year to accommodate the population increase,” the report states.

A quick breakdown on how inflation erodes the real value of apartments despite nominal prices increasing

Inflation refers to the general increase in prices of goods and services over time. When inflation occurs, each unit of currency buys fewer goods and services, leading to a decrease in the purchasing power of money. In other words, when inflation is high, the value of money decreases.

This means that even if the price of your apartment goes up, money buys less than it did before. In other words, the “real” value of what you own has gone down because your money doesn’t stretch as far.

Furthermore, say the nominal price of an apartment increases by 2%, but inflation for the year is 7%. This means that while your apartment’s price has gone up a little, the cost of everything else (like food, transportation, utilities) has gone up even more. So, in terms of what you can exchange your apartment for, its value has actually decreased.