Inflation has fallen rapidly, pulled down by imported deflation and a stronger
exchange rate (Figure 2). CPI inflation dropped from 4.2 percent in 2013 to 0.8 percent y-o-y in
January 2015, remaining below the CBI’s 2.5 percent target for a year. Longer term inflation
ICELAND
INTERNATIONAL MONETARY FUND 5
expectations have adjusted more slowly. Key driving factors have been disinflation in key trading
partners, particularly the euro area, a slump in oil prices, and an appreciating currency in the context
of high exchange rate pass-through. Domestic goods inflation has also fallen, despite higher wages
and a closing output gap. Housing prices and services have been holding up inflation. Despite rapid
growth in house prices, staff analysis