Thursday, 16 December 2021
Department of Finance
156. To ask the Minister for Finance the extent to which he remains confident that inflationary forces remain within the manageability of the economy; if indicators exist that such inflationary tendencies are likely to level off as predicted; and if he will make a statement on the matter. [62303/21]
The annual rate of consumer price (HICP) inflation rose to 5.4 per cent in November – the highest rate in more than two decades. The emergence of inflationary pressures in recent months is not unique to Ireland however, with inflation hitting multi-decade highs of 6.8 and 4.9 per cent in the US and euro area respectively in November.
The recent increase in inflation is partly explained by global factors, which are expected to ease over time. These include ‘base effects’ associated with the ‘normalisation’ of oil prices following their collapse last spring, the recent rise in wholesale energy prices 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.
At the time of the Budget, the Department forecast inflation of 2¼ per cent for this year and next year. Despite 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 there is likely to be upside to the projection for next year. Nevertheless, inflation is still expected to ease over the course of next year as some of these factors fade, demand stabilises and supply catches up. However, the possibility of persistently higher inflation cannot be ruled out. Additionally, the recent emergence of the Omicron variant means there is now greater uncertainty about the inflation outlook.
Needless to say, significantly higher inflation 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.