Government Targets Indexation Reform Amid Rising Inflation Concerns

2026-03-30 - 09:53

Iceland’s government plans to reduce the role of indexation in the economy as inflation and external pressures continue to affect households. As reported by RÚV, Prime Minister Kristrún Frostadóttir said inflation has reached 5.4%, rising by 1.7 percentage points since January. What's the Story? Inflation at 5.4%, up 1.7 percentage points since January, linked in part to rising oil prices Government plans to reduce the role of indexation in the economy by the end of next year Proposal to lower VAT on food rejected by government, citing impact on state revenues Central Bank of Iceland. Photo: Facebook. Economic policy focus In a statement, the Prime Minister pointed to global uncertainty, including oil price increases linked to geopolitical tensions, as a contributing factor. “It is not clear when we will see further openings in the Strait of Hormuz, but of course we must ensure that we have control over what we can control. That is why we placed all emphasis on delivering results on the right side of zero in the latest financial plan,” she said. The government aims to reduce the impact of indexation on borrowing costs, with changes expected before the end of next year. According to Kristrún, indexation contributes to higher interest rates and affects price stability. Proposals to lower value-added tax on food have been ruled out. “The VAT is of course the state’s largest single tax base. As soon as you start giving up this tax revenue, of course you reduce the state’s earnings, which then has an expansionist effect on the environment. These are also not very specific measures, everyone gets this extra payment, so to speak, or a discount, so I have not been in favor of taking such measures,” she said. Finance Minister Daði Már Kristófersson has also opposed such changes. Further economic coverage is available via Iceland Review.