The Central Bank of Iceland has published a working paper, “What sets the trend? The evolution and drivers of Icelandic trend inflation,” analysing how trend inflation in Iceland has evolved and what has driven changes in overall inflation dynamics. Using Bayesian methods to estimate a model with stochastic volatility in both trend and cyclical inflation and time-varying persistence of deviations from trend, the paper finds that trend inflation has fallen and become more stable since the mid-1980s. However, it attributes most of Iceland’s improved overall inflation performance to lower volatility and persistence in the cyclical component, while also indicating that the trend component’s share of overall inflation dynamics has increased significantly in recent years. It also concludes that Iceland’s trend inflation remains more volatile than in other advanced economies, linked to less firmly anchored inflation expectations and, more recently, the interaction between weakly anchored expectations and large global supply shocks.
Central Bank of Iceland 2026-03-31
Central Bank of Iceland publishes working paper on the evolution and drivers of Icelandic trend inflation
The Central Bank of Iceland has published a working paper analysing the evolution and drivers of Icelandic trend inflation using a Bayesian model with stochastic volatility and time-varying persistence. It finds that while trend inflation has fallen and become more stable since the mid-1980s, most of the improvement in overall inflation performance reflects lower volatility and persistence in the cyclical component. The paper concludes that Iceland’s trend inflation remains more volatile than in other advanced economies, linked to less firmly anchored inflation expectations and their interaction with large global supply shocks.