Iceland’s inflation crisis has reshaped the country’s economic landscape dramatically since 2023, with wages, prices, and the króna all swinging in ways that make normal business planning difficult, an economist told trade union members in Reykjavík on Thursday.
The remarks came at a breakfast meeting hosted by the retail and service workers’ union VR. Vilhjálmur Hilmarsson, an economist with the trade union Viska, told attendees that the volatility affecting the Icelandic economy goes well beyond a single indicator — it runs through every variable that shapes what it costs to produce and sell goods in Iceland.
“The real exchange rate measured by wages swings wildly, prices swing enormously, wages swing a great deal, everything that shapes production costs, the exchange rate of the Icelandic króna, and so on,” Hilmarsson said, according to Iceland Monitor (mbl.is English).
What Iceland’s inflation surge means for workers and businesses
The picture Hilmarsson painted is one of compounding instability. When wages rise sharply — as they have in Iceland since 2023, partly through large union-negotiated collective agreements — they feed back into the price of services, which in turn pushes headline inflation higher. The Seðlabankinn, Iceland’s central bank, has used high interest rates to cool demand, but the transmission has been slow and uneven.
The króna’s real exchange rate — the value of the ISK adjusted for inflation differences between Iceland and its trading partners — is one of the most watched signals for export-dependent industries like fishing, tourism, and aluminium smelting. When domestic costs rise faster than foreign ones, Icelandic exports become more expensive abroad, squeezing margins.
For ordinary workers, the volatility is felt at the checkout. Grocery prices in Reykjavík have risen noticeably since 2023. A basket of staples that cost around 5,000 ISK two years ago is likely to cost considerably more today, though specific current figures were not presented at the meeting.
Why the volatility is so hard to break
Iceland is a small, open economy with a population of roughly 380,000 people. It imports a large share of consumer goods and raw materials, which means the exchange rate has an outsized effect on domestic prices. When the króna weakens, import costs climb almost immediately. When wages then rise to compensate — as unions, including VR and Viska, push for — the cycle can repeat.
This is not a new pattern for Iceland. The country lived through severe inflation in the 1970s and 1980s, and then through the catastrophic financial collapse of 2008, which sent the ISK into freefall and pushed inflation to double digits. The difference now, economists argue, is that the current episode arrived in an economy that was considered well-recovered and running close to full employment.
Hilmarsson’s framing — that the situation has been effectively inflation on steroids since 2023 — reflects a broader frustration within the labour movement. Unions have secured significant wage increases over the past two years, but for many members those gains have been partially eroded by the very price rises that prompted them.
Trade unions watching closely as wage negotiations continue
VR represents workers in retail and service industries — sectors where low and middle-income earners are concentrated and where price sensitivity is highest. The union’s decision to invite an economist from Viska to present this analysis suggests the labour movement is sharpening its arguments ahead of any further wage negotiations.
The timing matters. Iceland’s broader wage settlement cycle tends to move in multi-year phases, and the ground is already being prepared for the next round of discussions. How Alþingi, the Seðlabankinn, and the major unions choose to coordinate — or fail to — will shape whether the volatility Hilmarsson described begins to moderate or persists into 2027.
Whether Thursday’s breakfast meeting marks the beginning of a more formal policy push by the labour movement remains to be seen, but the message from economists within Iceland’s union structures is clear: the instability is not yet behind the country.
Original source: Iceland Monitor (mbl.is English)
