Public-sector fee rises keep inflation above target, economist says

Public-sector fee increases have exceeded the inflation target, helping keep inflation higher than it otherwise would be, economist Konráð S. Guðjónsson told mbl.is. He said inflation would now be lower, and conditions in collective wage agreements might potentially have held later this month, if the increases had followed the target. He considers that outcome impossible at this stage.

The Central Bank of Iceland’s Monetary Policy Committee raised its key interest rate by 0.25 percentage points on Wednesday, bringing the rate to 8%. It was the third consecutive increase.

Central Bank Governor Ásgeir Jónsson said rising prices for taxes and public services were the main reason for increasing inflation, alongside the situation in the Middle East.

Although other factors are also contributing to inflation, Guðjónsson said tax and excise increases had clearly exceeded the inflation target. He cited car excise duties, which were raised at the beginning of the year.

He said the increase had been poorly considered and underestimated, as well as announced at short notice. The increase had clearly not produced the intended result, he said.

Inflation would now be lower by the same amount if the car excise duties had remained unchanged, according to Guðjónsson.

He also pointed to other increases introduced by the public sector, including charges for district heating, healthcare and university registration. More increases are still to come, he said.

“When you look at increases in public services and adjust for this system change and the kilometre charges, increases in certain components of the index are greater than inflation itself,” Guðjónsson said.

He said it was natural for pressure to build for increases in various charges when the state had been operating on the wrong side of zero for many years.

General inflationary pressure and wage increases also affect the public sector, just as they affect other parts of the economy, he said.

Overall, Guðjónsson said inflation would be lower and conditions in collective wage agreements might potentially have held later this month if public-sector price increases had followed the inflation target. With inflation measured at 5.3% in July and based on current forecasts, however, he said that was impossible.