Willie O'Dea (Limerick City, Fianna Fail)
Link to this: Individually | In context | Oireachtas source

152. To ask the Minister for Finance his projections for the inflation rate in the coming year and its likely impact on the economy, consumers and the public finances. [54379/21]

Paschal Donohoe (Dublin Central, Fine Gael)
Link to this: Individually | In context | Oireachtas source

While Covid-19 had a deflationary impact both in Ireland and internationally last year, inflation has picked up since the beginning of this year. According to the ECB ‘flash estimate’, the annual rate of HICP inflation is expected to reach 5.1 per cent in October – the highest rate since February 2003. The emergence of inflationary pressures is not unique to Ireland however, with euro area inflation expected to reach 4.1 per cent in October.

The increase in inflation since the beginning of this year is partly explained by temporary factors, which are expected to fade over time. These include ‘base effects’ associated with the ‘normalisation’ of oil prices following their collapse last spring and the imbalance between supply and demand that has emerged following the re-opening of the economy. This has been compounded by global supply chain disruptions, including transport bottlenecks, input shortages (e.g. semi-conductors) as well as labour supply shortages in some sectors. More recently, increases in the wholesale price of oil and gas have put additional upward pressure on prices, with energy inflation of around 18½ per cent recorded in September.

Looking ahead, inflation is expected to continue to rise over the rest of the fourth quarter and average 2¼ per cent for 2021 as whole. The most likely scenario is that inflation will moderate over the course of next year however as some of these temporary factors fade, demand stabilises and supply catches up. At the time of the Budget, inflation of 2¼ per cent was projected for 2022. However, the spike in international wholesale energy prices since the Budget 2022 macroeconomic forecasts were finalised means there could already be some upside to these projections. Indeed, a scenario analysis outlining the macroeconomic implications of higher than expected inflation is set out in the Economic and Fiscal Outlook published with the Budget.

Needless to say, significantly higher inflation than already projected for next year would have significant impacts on the wider economy and public finances. At the household level real incomes could be squeezed, while at the firm level higher input costs would affect competitiveness. Meanwhile persistently higher inflation could trigger higher interest rates (including a policy response by the ECB), which would have implications for Government financing costs as well as for mortgage interest costs. In light of these risks, my Department will continue to closely monitor and analyse inflationary developments over the coming months.