Why are the prices so high in Iceland? (2024)

Iceland is relatively expensive compared to many other countries but on the other hand, the average salary is higher than in most other countries. There are several reasons for Iceland’s high prices, including a small market, oligopoly, high reliance on imports, geographical isolation and high import taxes and tolls. Not everything is expensive in Iceland, however, the most notable exception is energy, including electricity, water and geothermal power, which is relatively cheap. That is an advantage for Iceland during the current global energy crisis.

Iceland’s geography means that most goods are imported and products need to be transported on container ships or by air. The small market only has a handful of companies handling imports to Iceland. Two companies take care of most shipping and the air cargo transport industry also has limited competition. The climate doesn’t help, as harsh weather conditions in winter can negatively impact transportation.

Oligopoly is a wide-ranging issue across sectors. Most Icelandic grocery stores are run by one of two companies, Hagar and Festi with a single location of American Costco as their main competitor. The same two companies own most gas stations and Costco runs one station, which also happens to be the cheapest alternative for car owners. And the list goes on.

Taxes in Iceland are high, including import taxes, and again, it’s due to Iceland’s small market and population. However, the state maintains a strong infrastructure, e.g. a wide-ranging welfare system and an extensive road network. When fewer people shoulder those costs, it means higher taxes per person. The state also levies heavy tolls on imports in order to maintain local production, for environmental, social, and safety reasons. Local production, e.g. food production, does not have the same economies of scale as producers in other countries and therefore cannot keep the prices down to the same level. In order to support local production, protective tariffs are used on imports. These reasons seemed validated e.g. during the Covid pandemic when global supply lines were disrupted.

Iceland’s small population leads to a small market making it less attractive to global companies. A good example is from the global financial crisis in 2008 when the exchange rate of the local currency ISK plummeted. McDonald’s no longer considered Iceland a feasible market to operate in, so they shut down all McDonald’s locations in the country. A side note: Some Icelanders were happy to see the American burger chain leave the country while others missed it immediately, some to the extent that the first thing they do when visiting other countries is to grab a McDonald’s burger. In a similar vein, some Icelanders have regularly complained about the lack of Starbucks, but the café chain has never seen a reason to open a branch in Iceland due to the small size of the market.

When Costco opened a store in Iceland in 2017, there was great excitement in the air, as Icelanders were only used to local grocery stores like Bónus and Krónan, where the variety is limited compared with other countries and prices are also significantly higher. The hype was so great that a large part of the population joined a Facebook group for sharing photos and prices of products bought in Costco. When this is written, roughly 25% of Iceland’s population are members of the group (97,482 members while the population of Iceland was 387,800 at the end of 2022).

Tourism has raised prices in certain categories, most notably the housing market where the explosion of Airbnb rental availability has limited the supply of housing available for locals to rent and pushed up prices. During the pandemic when tourism dried up in Iceland temporarily, the prices of rental housing unexpectedly went down after several years of steep increases, ever since the tourism boom around 2010. The government has taken initiatives to mitigate the Airbnb effect by setting a maximum of 90 days for short-term rental per year on the same tax level as other housing rentals. If people want to rent their apartments for more than 90 days each year, they’re taxed as if they were a business in the hospitality industry.

Through the years, Iceland has had numerous vicious circles of relatively steep salary increases followed by price increases, inflation and increased interest rates. At the time of writing, we are going up with the rollercoaster, as ongoing labour talks have proven tricky to resolve. Some workers are striking in an effort to get higher wages and the Central Bank just increased the interest rates for the 11th time in less than two years to combat inflation, which will in turn increase interest rates on people’s mortgages and increase the pressure on higher salaries.

The other side of the coin is that Iceland offers higher salaries and a relatively high purchasing power despite the high cost of living. In times of crises and rapid inflation, locals tend to do what they can to minimise such effects by reverting back to traditions from a time when tough times necessitated a more frugal way of life. For example, when the financial crisis hit in 2008, people started to buy and even make their own slátur (an Icelandic speciality from the innards of sheep, similar to the Scottish haggis). The innards of sheep also increased in popularity as the main ingredients for dinner, e.g. hearts, liver and kidneys. In times of crises, people also tend to buy more wool and the popularity of knitting goes up. Not only are woollen hats, mittens, and sweaters great for keeping out the winter cold, but the knitting itself is a pleasant, relaxing activity. Recipes for a classic fish stew (plokkfiskur) start to appear more frequently, and baking and bringing lunch packs to work or school become commonplace.

For tourists in Iceland, there are various ways to save while enjoying a great trip. For breakfast, you could get ingredients from the low-cost grocery stores such as Bónus (the cheapest supermarket in Iceland) and Krónan instead of more expensive convenience stores , e.g. oats, raisins, skyr, bread, butter, cheese, vegetables, coffee and juice. If you are taking a road trip, you can save time (and have more time to explore the country) by packing lunch to have on the way instead of eating in restaurants. When you want to eat out, these are among the more economical options in Reykjavík:

• Mandi offers Syrian food like shawarma and falafel and is probably the most popular lunch place in Reykjavík (it has a branch downtown and in Skeifan)
• The Noodle Station in Reykjavík is also widely popular and offers noodle soup available in three variations: chicken, beef and vegetable, along with a mix of secret ingredients
• Café Loki downtown Reykjavík offers a nutritious and filling Icelandic lamb meat soup and fish stew with rye bread
• Ramen Momo produces organic fresh noodles. Most of the ingredients in their dishes are locally made
• 101 Reykjavík Street Food specializes in local food as well as international favourites, e.g. fish & chips, Icelandic fish stew and lamb soup (kjötsúpa)

To sum up the points above, these are the main reasons for high prices in Iceland:

• Geographic isolation
• Oligopoly with very few companies dominating various sectors
• High taxes and import tolls
• Small population, hence a small market
• Many global companies don’t see the market as feasible (e.g. McDonalds, Burger King and Starbucks)
• Tourism has increased demand in some sectors and thereby the prices, most notably in housing, with Airbnb rentals

Despite high consumer prices, salaries are also high, which makes for a relatively high purchasing power in international comparison. Then there are various ways for people to save, including buying food in supermarkets rather than restaurants.

See also our ASK IR on the cost of living in Iceland.