Dr. Kieran McQuinn:

Housing inflation is an interesting point. There is a mathematical issue there in terms of how inflation is measured. There are two measurements: the consumer price index, CPI, and the harmonised index of consumer prices, HICP. One is a common measure across European data and the other is more specific to the domestic case. The CPI, which is a domestic measure we tend to focus on, incorporates housing costs while the HICP does not. Typically over the past 20 years, those two measures of inflation have been closely aligned but in the past year, or certainly the past six to nine months, there has been a divergence. The CPI has been higher by around 1.5% than the HICP. One reason for that is it incorporates housing costs. The way the CSO measures housing costs is essentially to look at mortgage repayments. Those repayments have gone up significantly in the past year, going back to the basis point increase by the ECB. That increases the CPI measure compared with the HICP. However, one of the ways increasing interest rates are supposed to operate and impact on inflation in the general economy is through the housing market. Rising interests rates over the medium term will adversely impact housing demand so, technically, housing costs should begin to come down as house prices begin to come down.

As I said, it is a kind of mathematical issue to a certain extent. Overall, however, when policymakers are raising interest rates such as what they are doing at the European Central Bank, ECB, one of the ways in which they are hoping to impact inflation through the general economy is through the housing market by eventually curbing demand in the market.