Inflation in the Irish economy unexpectedly rose to 8 per cent in February, up from 7.5 per cent the previous month, according to the latest harmonised index of consumer prices (HICP) compiled by the Central Statistics Office.
Analysts had been expecting another drop in the rate of price growth on the back of a fall in wholesale energy prices internationally and following three consecutive monthly declines.
The latest HICP for Ireland indicated that prices on a monthly basis rose by 1.4 per cent in February largely on the back of higher food and transport prices.
Food prices are estimated to have risen by 1.2 per cent in the last month and to have increased by 13.4 per cent in the last 12 months.
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Transport prices were up 3.6 per cent in annualised terms but were also said to be up on a monthly basis because of higher air fares.
Energy prices, meanwhile, are estimated to have decreased by 0.2 per cent in the month but were up 29.2 per cent since February 2022. The HICP index excluding energy is estimated to have grown by 5.8 per cent since February last year.
The EU’s statistical agency Eurostat will publish a flash estimate of inflation for the euro area as a whole on Thursday in advance of another expected European Central Bank (ECB) interest rate hike later this month.
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Frankfurt is expected to continue increasing interest rates despite the improved outlook amid concerns that price growth may stay above its target 2 per cent rate for longer than expected.
Since last July the ECB has embarked on an aggressive path of monetary tightening which has seen interest rates go from zero to 3 per cent. Markets have priced in another 0.5 per cent rate hike in March and expect interest rates to go to 3.75 per cent by summer.
The impact of rising rates on mortgage repayments will be significant with repayments potentially rising by over 60 per cent for first-time buyers.
The latest estimate of Irish inflation comes amid forecasts from the Minister for Finance Michael McGrath and employers’ group Ibec that inflation will this year fall more rapidly than anticipated.
Ibec is now forecasting inflation to drop below 4 per cent this year, significantly lower than its previous forecasts.
“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,” the group said in its latest quarterly report.
The more benign forecasts for inflation come against worrying economic data coming out of the US, which show the personal consumption expenditures price index, the Federal Reserve’s preferred gauge of inflation, shot up 0.6 per cent in January a month after gaining 0.2 per cent in December. The news sent markets into reverse last week and appeared to rule out the prospect of interest rate cuts this year.
Economists have been warning for some time that if inflation expectations become “de-anchored” and workers start demanding higher and higher wages, a wage-price spiral could develop. However wage data from the CSO, published on Tuesday, indicated that wage growth remained at about 4 per cent last year.
