Possible signs of rising inflation abroad and its potential impact on Iceland

Threats of a tariff war are disrupting global production chains and driving up costs, raising concerns that inflation abroad may be on the rise once again. Central Bank Governor Ásgeir Jónsson warned that similar inflationary pressures emerged after the pandemic when supply chains were thrown into disarray. If inflation continues to climb internationally, Iceland could feel the effects through rising prices on imported goods.

“There are many indications that inflation is rising abroad,” Jónsson stated at an open meeting of the Economic and Trade Committee this morning. He was responding to a question from Vilhjálmur Árnason, a member of parliament for the Independence Party, who noted that inflation in Norway had increased from 2.3% to 3.6%, driven in part by rising production and wage costs. Árnason inquired whether Iceland might experience a similar trend, especially following recent collective wage agreements.

Fears of renewed interest rate hikes

Jónsson highlighted growing concerns among central banks in both the United States and Europe that they may not be able to lower interest rates further. “In the U.S., there are even discussions about whether the central bank might have to raise interest rates again,” he remarked.

However, he pointed out that economic conditions in Europe and the Nordic countries differ significantly from those in Iceland. While many countries have struggled with stagnation or minimal growth since the pandemic, Iceland experienced a remarkable 20% economic growth between 2021 and 2023 and has already returned to pre-pandemic economic levels.

Contrasting economic conditions in Europe and Iceland

Jónsson noted that some European countries, such as Sweden, have faced economic downturns, with the Swedish and Norwegian currencies weakening. Furthermore, purchasing power in many parts of Europe has declined sharply in recent years, as wages have not kept pace with inflation. “In some cases, purchasing power has dropped by 5-10%,” he stated.

In contrast, Jónsson emphasized that Icelandic workers have been compensated for inflation—and in many cases, have seen wage increases that outpace inflation. Looking ahead, he suggested that wage growth in Europe may accelerate, given ongoing labor shortages and the likelihood that workers will push for higher wages after years of declining purchasing power. “The short answer is that the inflation outlook abroad is worsening,” he concluded.

Impact on imported goods in Iceland

If inflation continues to rise internationally, it could lead to higher costs for Iceland, particularly for imported goods. Jónsson pointed to items such as cars and washing machines as examples of products that could see price increases due to rising costs in global markets.