Inflation eases back to 5% but further price pressure expected in coming months

Headline inflation in the Irish economy eased back to 5 per cent last month, according to the Central Statistics Office (CSO). It had been running at a 20-year high of 5.5 per cent in December.

The month-on-month decline, the first in 14 months, may be short-lived, however, as soaring energy prices are expected to trigger further cost-of-living increases in the coming months.

The drop in January inflation may also have been prompted by post-Christmas sales price cuts and a drop in air fares, both of which are likely to reverse.

The CSO’s latest consumer price index shows the sectors with the largest increases in the year to January were transport (+14.1 per cent); housing, water, electricity, gas and other fuels (+12 per cent); and alcoholic beverages and tobacco (+8.4 per cent).

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Within the transport category, petrol and diesel prices have risen by 29.5 and 32 per cent respectively, meaning the cost of filling a tank of petrol or diesel is now a third higher than this time last year. Airfares were also up by 26.7 per cent.

The introduction of minimum pricing for alcohol last month drove the increase in that category.

Electricity and gas prices have also surged, by 22.4 and 27.7 per cent respectively, while home heating oil is up over 50 per cent.

These increases, however, do not reflect the rise in wholesale energy prices, which have been even steeper. This is because companies have been hedging or forward-buying supplies, effectively shielding themselves and consumers from the full hit. However, many of these hedging contracts are now exhausted and a painful pass-through to consumers is expected in the coming months.

Firmus Energy, formerly Bord Gáis’s operation in the North, announced last week that it planned to increase prices by 33.57 per cent from the end of this month.

Staple goods

According to the CSO, clothing and footwear (-3.7 per cent) and miscellaneous goods and services, which includes insurance, (-0.8 per cent) were the only two divisions to see prices fall.

As part of the data the CSO also published updated national average prices for a selected number of staple goods. The average price for a large white sliced pan was up 10 cent in the year, it said, while a pound of butter was up 12 cent.

KBC Bank Ireland economist Austin Hughes said the slight easing of inflation should “be seen as a welcome if likely temporary interruption to the sharply rising trend evident through most of 2021”.

“Inflation should pick up in coming months, with the unpredictable evolution of energy costs determining how far and how fast before easing later in the year,” he said, noting the pull-back in Irish inflation in January was not seen in most other economies.

“With energy prices remaining elevated and upside risks to the outlook for food and many other prices, it seems that Irish inflation could run somewhat hotter in the next few months,” Mr Hughes said. “As a result, inflation is likely to be close to 5 per cent for 2022 as a whole.”