Bernard Durkan (Kildare North, Fine Gael)
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20. To ask the Minister for Finance the extent to which he acknowledges that inflation has become an issue likely to impact on Ireland’s economy in the future; the steps taken to date or envisaged to combat this trend; the actual individual direct causes of the inflation; his views on the steps that need to be taken to arrest the trend at an early date; and if he will make a statement on the matter. [44795/21]

Paschal Donohoe (Dublin Central, Fine Gael)
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I am very conscious of the pick-up in consumer price inflation in recent months.

While Covid-19 had a deflationary impact both in Ireland and internationally last year, inflation has picked up since the beginning of this year. In Ireland, the annual rate of HICP inflation rose to 3 per cent in August – the highest rate since 2008; similar trends have been observed across other advanced economies.

The increase in inflation since the beginning of this year is largely explained by temporary factors, which are expected to fade over time, including ‘base effects’ associated with the normalisation of oil prices following their collapse last spring. More fundamentally, 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 than the recovery in demand with, for instance, labour shortages in some 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 the July and August inflation data from the Central Statistics Office. 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. Persistently higher inflation could trigger monetary policy changes by the ECB, with implications for the cost of Government borrowing.

In summary, the most likely scenario is that the current pick-up in inflation - in Ireland and elsewhere - is temporary, and will moderate as one-off factors fade and as demand stabilises and supply pressures ease. That said, the possibility of a more sustained and persistent rise in inflation cannot be ruled out. This is another reason why budgetary policy must evolve in line with the improving epidemiological situation; Government adopted a counter-cyclical approach to budgetary policy during the downturn and we will do so in the recovery phase also.