Iceland's Annual Inflation Rate Climbs to 5.2% in January, Highest in Over a Year

Inflation Surges to 16-Month High

Reykjavík, Iceland – Iceland's annual inflation rate accelerated to 5.2% in January 2026, an increase from 4.5% recorded in December. This marks the highest inflation level observed in the country since September 2024, according to newly released figures from Statistics Iceland. The consumer price index (CPI) reached 668.3 points in January, reflecting a 0.38% rise from the previous month.

Key Factors Driving the Price Increase

Several factors contributed to the notable uptick in the inflation rate. Changes to vehicle-related taxes at the beginning of the year played a significant role. The abolition of fuel tax and excise duties was accompanied by an increase in carbon tax, the introduction of new mileage charges, and adjustments to vehicle excise tax and electric vehicle subsidies. These shifts led to a substantial 633.4% increase in road tolls. Additionally, overall car prices saw a 13.3% increase, with electric cars rising by 6.4%, hybrid cars by 16.3%, and petrol and diesel cars by 19.8%.

Beyond transportation, the cost of food and non-alcoholic beverages rose by 1% in January. Inflation for housing and utilities also accelerated to 7.2%, while transport inflation increased to 4.6%.

Offsetting Trends and Official Response

Despite the overall rise, some sectors experienced price decreases. Clothing and footwear prices fell by 7.4%, and furniture and household appliances saw a 5.4% drop. International airfares also declined by 10.8%. Furthermore, petrol prices decreased by 27.4% and diesel prices by 24.2% due to the aforementioned tax changes, though their impact was largely counteracted by other rising costs.

The Central Bank of Iceland maintains an inflation target of 2.5%, with its current policy rate standing at 7.25%. The next decision on the policy rate is scheduled for February 4. The latest inflation figures have exceeded forecasts from leading analysts, including Íslandsbanki, Arion Bank, and Landsbankinn.

Prime Minister Kristrún Frostadóttir has publicly expressed disappointment regarding the inflation figures, acknowledging the challenging economic circumstances facing the nation. This marks the second consecutive month where inflation has surpassed expectations.