Iceland’s inflation rate jumped to 18.6 per cent in January, the highest in 19 years, after last year’s slump in the krona pushed import prices higher.
Inflation accelerated from 18.1 per cent in December, Reykjavik-based Statistics Iceland said on its Web site today. Prices rose 0.6 in the month.
Soaring import prices, after the krona lost about two thirds of its value last year, will contribute to a 24 per cent slump in consumer spending in 2009, forcing a 9.6 per cent contraction in gross domestic product, the International Monetary Fund estimates.
The island’s economic turmoil has sparked protests, leading to the collapse of the ruling coalition, with talks underway to form a new government.
“An inflation slowdown is around the corner, given that the plan to stabilize the krona succeeds,” said Jon Bjarki Bentsson, an economist at Glitnir Bank.
The IMF called on the central bank to raise the key interest rate to a record 18 per cent in October to stem a sell- off of the krona. Inflation will also slow as the recession forces down house prices, included in the consumer price index, Bentsson said.
Inflation will average 14.3 per cent this year, ending 2009 at 4.5 per cent as demand stalls, forcing down local prices, the IMF estimates.
The Social Democrats, part of the former administration, and the opposition Left Green Movement are holding talks on forming an interim government until early elections are held on May 9th. The Left Green party has said it wants borrowing costs to come down faster than the IMF has forecast.
Bloomberg