Surprise increase in inflation runs counter to forecasts

Forecasts that inflation in the Irish economy will fall more rapidly than previously expected hit a speed bump on Wednesday when a provisional estimate for annualised price growth in February was put at 8 per cent, up on the previous month’s 7.5 per cent rate.

It had been assumed that inflation, after peaking at 9.4 per cent in October and moderating downwards for the following three months, would continue to soften in February.

[ Irish inflation unexpectedly rises to 8% in February ]

The latest harmonised index of consumer prices (HICP) compiled by the Central Statistics Office (CSO), which is separate from the agency’s monthly consumer price index (CPI), however, pointed to a pickup in price growth, largely on the back of higher food and transport prices.

Food prices were up across the board, rising by 1.2 per cent on a monthly basis and by 13.4 per cent year on year, a reflection of the higher input prices faced by producers. The other driver of the monthly increase was transport costs, up by 3.6 per cent on last year.

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The CSO didn’t give the monthly increase in transport costs but they were said to have been lifted by higher air fares. Does that reflect more Irish people taking holidays? It’s not clear.

The combined effect of higher food prices and transport costs pushed headline inflation back up to 8 per cent. Significantly, food and transport outweighed the impact of falling energy prices. Energy prices were down by 0.2 per cent on a monthly basis but still up by 29.2 per cent in annualised terms.

Minister for Finance Michael McGrath and employers’ group Ibec have both been out in recent days, predicting inflation will this year fall more rapidly than previously anticipated. Ibec believes it will drop to below 4 per cent before the year is out.

“At the time of the budget, we anticipated that the annual rate of inflation for this year would average around 7 per cent, with the annual rate falling to 4 per cent in the final quarter of the year,” the Minister said. “These were based on the assumption of oil and natural gas prices at the time of the budget. Thankfully, wholesale prices have fallen sharply since then and – provided there is no further energy price shock – inflation is set to fall much more rapidly than previously assumed, and we now believe it will average between 4 and 5 per cent across the year.”

“While significant uncertainties remain, recent reductions in the volatility of wholesale energy prices, an easing of inflationary momentum and resilient global demand mean that we should be more confident about 2023 than we might have expected to be late last year,” Ibec said.

“Whilst the period of rapid inflation is behind us, inflation will remain above the record lows of the past decade and the ECB target of 2 per cent. The driver of this above-trend inflation, in the short term, is that the level shift in prices experienced in the past 12 months will take time to work through supply chains, the labour market and other margins of adjustment.”

The latest estimate doesn’t torpedo those predictions but it sounds a note of caution. The big determinant of where inflation goes from here is still the price of energy. While it is coming down, it is still elevated and above pre-pandemic levels.

If energy prices fall further over the summer, combined with year-on-year base effects, we’ll see further falls in headline inflation, but Russia’s war in Ukraine remains an unknown factor in all this.