Inflation in Iceland

A short history of inflation in Iceland

Chronic Inflation (1970s to 1990)

Iceland reached 25.2% in the year to December 1989, at the end of two decades in which inflation was a normal feature of Icelandic life, frequently above 20% and at times far higher. A small economy dependent on fish exports, with wages indexed to prices and a currency repeatedly devalued to protect the catch's competitiveness, had most of the ingredients for it. Indexation of wages was ended and inflation fell through the 1990s, and the Central Bank of Iceland adopted a formal inflation target in March 2001.

The Banking Collapse (2008 to 2010)

It returned when the three main Icelandic banks failed within a week in October 2008, having grown to many times the size of the economy behind them. The krona lost roughly half its value and inflation reached 18.6% in the year to January 2009. Capital controls, imposed during that crisis and lifted only in 2017, are what allowed it to be brought back down.

Post-Covid Inflation (2021 to 2023)

In Iceland, prices rose fastest in February 2023, at 10.2%. The causes of the post-Covid inflation were global in nature, beginning with the lockdowns: factories and ports closed and the shipping between them fell out of sequence, so goods took longer to make and longer to arrive. Governments had spent heavily supporting household incomes through those closures, so when restrictions lifted there was money waiting to be spent and not enough on the shelves to spend it on. Then in February 2022 Russia invaded Ukraine, disrupting two of the world's largest suppliers of wheat, fertiliser, oil and gas at once, and the cost of everything grown, heated or transported rose with them.

Because the causes were shared, so was the timing: most countries peaked within a few months of one another in late 2022. The major inflation events covers this episode and the others in more detail.