Bernard Durkan (Kildare North, Fine Gael)
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58. To ask the Minister for Finance the extent to which the existence of even moderate inflation can affect Ireland’s economy in the future; the extent to which the causes of same continue to be identified with a view to addressing the issue; and if he will make a statement on the matter. [44796/21]

Paschal Donohoe (Dublin Central, Fine Gael)
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While Covid-19 had a deflationary impact both in Ireland and internationally last year, inflation has picked up since the beginning of this year. The annual rate of HICP inflation rose to 3 per cent in August – the highest rate since 2008. Similar trends have been observed across advanced economies, with inflation rates of 5.3, 3.2 and 3 per cent recorded in the US, UK and euro area in August.

However, the increase in inflation since the beginning of this year is largely explained by temporary factors, which are expected to fade over time, including the reversal of the temporary VAT cut and ‘base effects’ associated with the normalisation of oil prices following their collapse last spring. More fundamentally, on the demand side the easing of restrictions led to a rapid rebound in consumer spending, in particular spending on goods, in the second quarter. As the economy continues to re-open, demand will pivot towards contact-intensive service sectors.

Supply by contrast has recovered more slowly, with labour shortages in service sectors putting upward pressure on prices. Indeed, signs of ‘opening up’ inflation are already evident, with strong increases in prices in the transport and hospitality sectors recorded in July and August. Shipping bottlenecks and shortages of inputs (e.g. semi-conductors, timber) have also raised production costs, putting further upward pressure on prices. Higher trade costs as a result of Brexit may also have contributed to the recent rise in inflation.

The emergence of inflationary pressures has prompted a debate regarding the likely persistence of these price dynamics as consistently higher inflation could trigger monetary policy changes by the ECB, with implications for the cost of Government borrowing. Looking beyond the short-term, however, it seems likely that these temporary factors will fade as demand stabilises and supply pressures ease. Consistent with this view, the ECB last week reiterated that the current inflationary pressures are largely temporary and inflation in the euro area is still expected to remain below 2 per cent over the medium term. Nevertheless, my Department will continue to closely monitor and analyse inflationary developments and will publish updated inflation and economic forecasts alongside the Budget in the autumn.