On the basis of current assumptions for the development of external conditions this year and in 2004, prices of marine products are now expected to fall by 4% this year and to remain unchanged between 2003 and 2004. Exports of marine products are expected to grow by 3% this year due to increased quotas for the fishing year [beginning September 1] and a larger blue whiting harvest this summer. The assumed increase in catch volume for 2004 is 5%. Aluminium prices are expected to rise by 4% this year, based on futures prices and the pricing assumptions of the two aluminium companies, Norðurál and Alcan Iceland. Import prices in foreign currency are expected to decrease by ½%. Fuel prices are based on futures. These have been on an upward trend in recent weeks and are now expected to rise by 9% this year but fall by 14% in 2004. The terms of trade for goods and services are expected to deteriorate by 1½ percentage points this year. In 2004 they are expected to improve by three-quarters of a percentage point. Assumptions for short-term foreign interest rates are 3% this year and 3½% next year. BIS Review 45/2003  3  According to the Central Bank’s macroeconomic forecast, output growth will be 2¾% this year and 3½% in 2004. This forecast assumes that the Norðurál aluminium smelter expansion will go ahead; if not, the respective growth figures would be 2¼% and 2¾%. Private consumption growth is forecast at 2% this year and 3% next year.
Over the past 12 months, Core Index I has risen by 2.7% and Core Index II by 2.4%. Underlying inflation is therefore somewhat closer than the CPI to the Central Bank’s target. It is interesting to examine the development of individual components of the CPI. The housing component, for example, has risen by 13.6% over the past 12 months and the upward trend shows no sign of coming to an end. Public service prices have also had a considerable impact on the CPI over the past 12 months, but the rate of increase has slowed down. Measures taken to forestall an inflation-  BIS Review 45/2003  1  triggered national wage review in 2002 included a freeze on public service prices, which was relaxed when the risk connected with exceeding negotiated inflation ceilings had abated. There has also been a slowdown in the twelve-month rise in private services, which are highly sensitive to domestic wage increases. On the whole, goods are more sensitive than many other index components to changes in the exchange rate. Last year’s strengthening of the króna is clearly reflected in goods prices, with a significant drop in import prices. In 2003 prices of both imported and domestic goods have fluctuated somewhat. For decades, a far too high rate of inflation was one of Iceland’s main economic problems. This had an adverse effect on businesses, making effective planning difficult. It also had an adverse effect on households, partly because a large proportion of household debt is indexed to inflation.