Reykjavík Was Burning, Trump Added Gas

Iceland’s evolving cost-of-living crisis, now with US tariffs

What we mean when we say something is Dickensian isn’t just poverty or hardship. We mean a system that grinds people down without noticing them. A structure that runs on rules designed by someone else, somewhere else. An economy where ordinary people navigate pressures that feel simultaneously unfair and inevitable. Icelanders aren’t facing Victorian factory floors, but they are facing rising costs, shrinking choices, and a growing sense that the squeeze is tightening from all directions.

Now, another layer of pressure has landed, and it comes with a return address. On April 5, 2025, the Trump administration introduced a sweeping 10 percent baseline tariff on all imported goods, including goods from Iceland. Then, on August 1, 2025, Icelandic products specifically were raised to 15 percent. For a small, export-dependent island whose cost of living ranks among the highest in Europe, often second only to Switzerland, this is yet another burden on an already overtaxed system.

But what Iceland is experiencing isn’t quite Dickensian. It’s more Oddssonian*. To understand where Iceland finds itself today, caught between currency volatility, shocking housing costs, and now international trade wars, we need to go back to where it all began. Back to a man whose decisions still echo through every Icelandic household’s monthly budget.

The root of our current challenges

If you had to identify a single person who set the conditions for Iceland’s economic predicament, you’d start with Davíð Oddsson. Not because he created every problem Iceland faces today, but because his fingerprints are all over the structural vulnerabilities that turned global pressures into domestic crises.
“The Oddsson effect isn’t ancient history. It’s the structural foundation upon which Iceland’s current cost-of-living crisis rests.”

As Adam Grant notes in Think Again, when an economist was asked to name the three people most responsible for Iceland’s 2008 bankruptcy, she nominated Davíð Oddsson for all three spots. This wasn’t just about Iceland’s 2008 collapse. Time Magazine included Oddsson among its “25 People to Blame for the Financial Crisis,” recognising that Iceland’s implosion epitomised the wider global meltdown.

To be fair, Oddsson’s policies didn’t emerge in a vacuum. They were responses to the hyperinflation chaos of the 1970s and 80s, when Iceland endured price rises above 70 percent and an unworkable monetary system. Many older Icelanders credit his reforms after 1993 with stabilising the economy, and that legacy is real. The problem is that the same policies that solved yesterday’s instability also contributed to today’s challenges.

The Oddsson effect isn’t ancient history. It’s the structural foundation upon which Iceland’s current cost-of-living crisis rests. Iceland’s own Special Investigation Commission (SIC) proved this connection explicitly. The SIC’s damning 2010 report diagnosed the 2008 crash and warned that the structural vulnerabilities Oddsson created would continue causing problems if left unchanged. Those warnings went unheeded.

Oddsson’s decisions to privatise the banks, float the króna, and position Iceland as an experiment in free-market economics created the conditions that still determine how much Icelanders pay for everything. In 2004, his decision to loosen the state housing fund’s mortgage rules, over explicit Central Bank warnings, turbocharged housing prices and locked families into inflation-indexed debt that keeps rising with every price spike.

The króna that Oddsson floated, beginning in 2001, remains vulnerable to sharp swings of global sentiment, making imports expensive when the economy struggles. The financial system he designed around privatised banks still channels international volatility directly into domestic prices. The small, open economy he championed remains vulnerable to external shocks like sudden tariffs from trading partners.

These aren’t abstract vulnerabilities. They show up every month in household budgets across Iceland, determining how much ordinary people pay for rent, groceries, and the basic costs of living. To understand how structural economic choices become personal financial stress, meet the people living with the consequences.

Declining purchasing power

Meet Ólafur Tvistur. He’s not a real person, but he represents thousands of real Icelanders caught in the cost-of-living squeeze.

Ólafur teaches at a primary school in Reykjavík, earns what should be a respectable middle-class salary, and should theoretically be comfortable. Instead, he’s trapped in what economists politely call “purchasing power erosion” and what everyone else calls getting poorer while your paycheque stays the same.

His rent in Reykjavík consumes 60 percent of his after-tax income, double what housing experts consider sustainable. When he looks at buying a flat, he discovers prices have roughly doubled since he started saving, and his income has increased much less than that. He’s making daily sacrifices to save as much as he possibly can, but at this rate he might be able to afford the deposit for a one-bedroom flat sometime around 2037. Of course, by then, the same flat will likely cost multiples more. He wonders if he might be able to afford a modest flat in time for his retirement.
“The SIC’s damning 2010 report diagnosed the 2008 crash and warned that the structural vulnerabilities Oddsson created would continue causing problems if left unchanged.“

His grocery bill keeps climbing. Not dramatically in any single month, but steadily, relentlessly. The weak króna makes imports expensive, which is problematic when you live on an island that imports most of its food. And there’s another mechanism that makes Iceland’s cost increases particularly systematic.

Iceland is unusual among developed economies in how it uses its Consumer Price Index. While most countries treat CPI as a measurement tool, Iceland builds it directly into the economy’s pricing structure. Wages, rents, service contracts, and government fees are indexed to monthly CPI releases from Statistics Iceland. This practice stems from the high-inflation 1970s and 80s, when indexation was seen as protection against rapid price erosion.

The result is a mechanical transmission system that turns temporary price increases into permanent ones. When housing costs or import prices rise, they push up the CPI. The higher CPI then triggers automatic adjustments across the economy: rental contracts, union wage agreements, utility tariffs, insurance premiums, business service contracts, membership fees, and countless other agreements that include indexation clauses. These adjustments feed back into the next month’s CPI calculation, creating a self-reinforcing cycle that makes inflation stickier and harder to control than in countries where contracts aren’t indexed to price movements.

In advanced economies today, Iceland’s comprehensive CPI indexation is fairly unique. The Central Bank of Iceland regularly highlights this feedback loop as a structural challenge in controlling inflation.

For Ólafur, this means that even when external shocks like currency weakness or import disruptions fade, their effects linger in his monthly expenses through the indexation mechanism. Even locally produced items carry the cost of imported inputs: from ingredients, to fuel, to packaging.

Ólafur’s situation was already precarious before the latest external shock arrived. Now Trump’s tariffs are about to demonstrate exactly why Iceland’s structural vulnerabilities matter, and how quickly external pressures become domestic problems.

Trump’s tariffs

The 15 percent US levy won’t immediately show up in Ólafur’s shopping basket, but it illustrates perfectly how Iceland’s economic structure amplifies distant problems. These tariffs hit Icelandic exports to America, not American imports to Iceland. But in an economy as interconnected as Iceland’s, external pressures have a predictable way of becoming internal problems.

For Ólafur personally, Trump’s broader tariff policies in general may actually hurt more than the specific duties on Iceland. The US administration’s sweeping import tariffs will raise prices on American goods that Iceland relies on heavily, from food products to machinery. Those higher costs get passed directly to Icelandic consumers.

The mechanism is straightforward. When the US puts tariffs on imports, American companies pay more for foreign goods and raise their prices accordingly. Since roughly 10 percent of all imports to Iceland are from America, those price increases flow directly through to Icelandic shops and businesses. There’s no buffer.

Finance Minister Daði Már Kristófersson acknowledges the challenge, “Of course, we are a small and open economy… tariffs on Icelandic products are never good news.”
“While the US isn’t Iceland’s largest trading partner —the EU takes about 62.5 percent of exports — American trade provides crucial dollar earnings that help stabilise the króna.”

Iceland’s two dominant export industries to the US — seafood and aluminium — together account for roughly 90 percent of exports to America. The seafood industry, which employs thousands in coastal communities, and aluminium production, which consumes the majority of Iceland’s renewable energy, both suddenly face higher barriers in what represents about 11.5 percent of Iceland’s total export market. While the US isn’t Iceland’s largest trading partner — the EU takes about 62.5 percent of exports — American trade provides crucial dollar earnings that help stabilise the króna.

This is how distant trade policies become domestic cost-of-living pressures. It’s not immediate, but it’s likely inevitable. Economists note that even if tariffs are limited to export sectors, they can weaken the króna and feed through into inflation. For Ólafur, this means the dream of finally being able to afford that avocado toast everyone talks about moves even further out of reach.

The tariff pressure lands on an economy already stretched thin. To understand just how thin, look at where the squeeze hits hardest. Housing is the single expense that defines whether Iceland remains liveable for ordinary families.

Housing crisis at the centre

If there’s one issue that crystallises Iceland’s cost-of-living crisis, it’s housing. Here you can see all of Iceland’s structural vulnerabilities working together: high interest rates needed to stabilise the currency, expensive imported construction materials, planning restrictions that limit supply, and increasingly corporate investment competing with locals for finite stock. Investment funds, backed by pension capital required by regulation to be invested domestically, treat housing as an asset class rather than homes, echoing global trends. Iceland also provides among the weakest tenant protections in Europe, leaving renters vulnerable to sudden rent hikes and evictions.

The numbers tell the story. A typical flat in Reykjavík costs around 80-100 million ISK. A teacher like Ólafur might earn 600.000 ISK monthly before taxes, leaving him with perhaps 400.000 ISK after deductions. With rent consuming 240.000 ISK monthly (already 60 percent of his take-home pay), saving for a 20 percent deposit means accumulating 16 million ISK, or about three years of his entire salary, assuming he spent nothing else. With current interest rates pushed high to combat inflation, monthly mortgage payments can easily exceed rent costs, yet you can’t escape the rent trap without the deposit.

The generational impact is stark. Between 2005 and 2024, homeownership among 25-49 year olds fell from 69 percent to 55 percent, while ownership among those 50+ rose from 74 percent to 77 percent. Today, people over 50 own about two-thirds of all dwellings held by individual owners, despite being less than half of that population. About 30 percent of men and 25 percent of women aged 18-36 still live with their parents, and this trend has worsened as housing costs have spiked. An entire generation finds itself priced out of a market that works only for those treating homes as financial instruments.

Relatively high salaries that buy relatively less

According to Eurostat data, Iceland consistently ranks among the most expensive countries in Europe for consumer goods. In 2024, Iceland’s price level reached approximately 173 percent of the EU average, about 73 percent above the European norm — second only to Switzerland. This represents a worsening from already extreme levels. Iceland’s prices were 56 percent above the EU average in 2018 and 59 percent above in 2022.
“If seafood exports to the US decline significantly, and early reports suggest companies like Hólmasker are already feeling the pinch, Iceland’s trade balance could worsen.”

The impact on households has been severe. According to Varða surveys of wage-earner households, the share reporting difficulty making ends meet surged from just over 23 percent in 2021 to over 44 percent in 2023, nearly doubling in two years. Though the figure eased slightly to around 41 percent by spring 2024 as inflation began to fall, roughly two-fifths of working households remained under financial strain. This represents one of the worst deteriorations in household financial conditions among Nordic countries.

The peculiar cruelty is that Iceland has high nominal wages. Icelanders earn impressive salaries on paper. In practice, after accounting for housing costs, import prices, and tax rates, purchasing power often falls below what workers in supposedly “poorer” European countries like Poland enjoy, despite much lower wages.

Economic vulnerability in a small nation

The US tariffs arrive at precisely the wrong moment. Iceland’s economy was showing signs of stabilisation after years of high inflation and interest rates. The Central Bank had begun cutting rates as inflation cooled. There was cautious optimism about 2025.

Now that optimism faces a stress test. If seafood exports to the US decline significantly, and early reports suggest companies like Hólmasker are already feeling the pinch, Iceland’s trade balance could worsen. A weaker trade position typically means a weaker currency, which feeds back into import costs and domestic inflation.

Foreign Minister Þorgerður Katrín Gunnarsdóttir captured Iceland’s position with diplomatic precision: “Iceland is not high on the US government’s priority list… we are ready and intend to be prepared when that conversation begins.”

Structural problems without easy solutions

Iceland has abundant renewable energy, well-managed natural resources, political stability, and sophisticated institutions i.e., hip English-language alt papers. By most measures, Iceland is thriving.

However, structural choices made decades ago have created an economy that transforms every external shock into domestic hardship. The floating currency that was supposed to provide flexibility instead provides volatility. The open economy that was supposed to bring prosperity instead brings vulnerability. The financial liberalisation that was supposed to increase efficiency instead increased instability.

This isn’t a design flaw. The Iceland model prioritises adaptation and growth over stability and predictability. It works brilliantly when global conditions are favourable and punishes everyday Icelanders when they’re not.

The path forward

For Ólafur Tvistur and thousands like him, the immediate future holds more of the same. More careful budgeting. More deferred dreams. And the gnawing sense that the system isn’t working for ordinary people.

The tariff situation may resolve itself through diplomacy or evolving US priorities. But the underlying structural vulnerabilities will remain. Iceland’s currency will continue to fluctuate. Housing will remain expensive. Import costs will vary with global sentiment and exchange rates.

What’s needed isn’t just policy tweaks but an honest reckoning with the Oddssonian trade-offs built into Iceland’s economic model. The country can continue prioritising adaptation and growth over stability and predictability, accepting that external shocks will keep translating into domestic hardship. Or it can acknowledge that an economic model that consistently makes life harder for ordinary families might need fundamental revision.

Ólafur Tvistur embodies that choice. His story isn’t Dickensian melodrama. Those were problems of poverty in a poor country. This is something newer and more complex. It’s middle-class precarity in a wealthy nation whose economic structure systematically transfers global volatility to household budgets.

The Oddsson effect continues, written into the foundation of how Iceland works. The question is whether that foundation serves the people living on top of it.

*Editor’s note: This article uses Oddsson, and Oddsonian, in violation of standard practices in Iceland. In general, patronymics, or what are seen as last names, are not used in Iceland. However, because the basis of this piece depends strongly on international dialogue about the former prime minister, we are violating the practice of using the first name only in the interest of clarity.