Carol Nolan (Laois-Offaly, Independent)
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244. To ask the Minister for Finance the steps he is taking to address and alleviate the rise in inflation; and if he will make a statement on the matter. [7136/22]

Paschal Donohoe (Dublin Central, Fine Gael)
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Consumer price inflation picked up sharply over the second half of last year and by December was running at 5.7 per cent – the highest annual rate in more than two decades. While some moderation was evident in January, the annual rate is still 5.0 per cent. Almost every advanced country in the world is in the same position. In the euro area, the annual inflation rate reached a record high of 5.1 per cent in January, while inflation rates of 7 and 5.4 per cent were recorded in the US and UK in December.

At the time of Budget 2022, my Department forecast headline inflation of 2¼ per cent for this year. Due to energy price spikes in the fourth quarter last year, there will be upside to this projection, with inflation of around 4 per cent now more likely. Nevertheless, inflation is expected to ease over the course of the year as some of the temporary drivers of inflation fade, demand eases and supply begins to catch up.

The Government is very conscious of the cost pressures facing households and accordingly introduced a large range of measures to protect households from the rising cost of living as part of Budget 2022. These measures cover a range of costs to people including health costs, income supports, family and child costs, energy costs, and supports for the costs of housing and education. Specifically, the fuel allowance was increased by €5 per week and there were increases in the allocation of Early Learning Care and School-Age Childcare to ensure childcare prices do not rise. The Budget package also included a personal income tax package worth €520m and a social welfare package of over €550m. On foot of significant increases in energy prices, the Cabinet further approved an Electricity Costs Emergency Benefit Paymentof up to €100 to be made this year to an estimated 2.1m domestic electricity account holders.

In addition, the Government is currently considering further measures to help alleviate some of the cost pressures facing households. When considering the policy response it is important to bear in mind that household balance sheets, on aggregate, are in a very strong position, in large part due to the supports provided to households by government throughout the pandemic. In contrast, the government balance sheet is in a less favourable position, with a debt-GNI* ratio of 106 per cent recorded at the end of last year. We must also be very careful not to generate second round effects – pouring more money into the economy could generate further inflation and be self-defeating.

Furthermore, the era of cheap money is now coming to an end. The higher inflation environment has brought about an earlier than expected change in the monetary policy cycle. The Bank of England increased interest rates again last week and the US Federal Reserve is expected to begin ‘lift-off’ next month. In the euro area, market participants are now pricing in two interest rate increases this year; these come on top of the ending of the Pandemic Emergency Purchase Programmenext month. The net effect of this monetary policy shift is expected to be a higher cost of sovereign borrowing. In light of these considerations, any further support provided should be temporary and targeted.