Thursday, 18 November 2021
Department of Finance
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 5.1 per cent in October – the highest rate since 2003. The emergence of inflationary pressures is not unique to Ireland however, with inflation rates of 6.2 and 4.1 per cent recorded in the US and euro area respectively in October.
The recent rise in inflation is partly 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 and the imbalance between supply and demand that emerged following re-opening. This has been compounded by global supply chain disruptions, including transport bottlenecks, input shortages (e.g. semi-conductors) and labour supply shortages in some sectors. More recently, increases in wholesale energy prices have put additional upward pressure on prices, with energy inflation of 24 per cent recorded in October.
Looking ahead, the most likely scenario is that inflation will moderate over time as temporary factors fade, demand stabilises and supply pressures ease. The Department is forecasting inflation of 2¼ per cent this year and next. Notwithstanding the strong pick-up in the rate of inflation in recent months, the rate for 2021 as a whole is likely to be close to the Department’s projection. However, the recent spike in wholesale energy prices means that there could already be some upside to the projection for next year. Indeed, the upside scenario published alongside the Budget, which incorporated these price rises and other factors, would suggest that an inflation rate between 2½ to 3 per cent for 2022 is now increasingly likely.
The Government is very conscious of inflationary pressures and introduced a range of measures in Budget 2022 to protect households against increases in the cost of living, including a personal income tax package worth €520m and a social welfare package of over €550m. The fuel allowance was increased by €5 per week to compensate lower income households for the additional energy costs they are likely to incur due to an increase in the carbon tax. There were also increases in the allocation of Early Learning Care and School-Age Childcare to ensure childcare prices do not rise.
Additionally, the Government is pursuing a broadly neutral budgetary policy in order to contain domestic inflationary pressures. It is crucial that we do not have an inflation ‘chain reaction’ which would damage our international cost competitiveness.