The inflation outlook is confusing enough without having two inflation yardsticks, each giving a different read on where prices in Ireland are at.
According to the official measure of inflation, the Consumer Price Index (CPI), prices here rose at an annual rate of 5.8 per cent in July, but according to the harmonised index of consumer prices (HICP), headline inflation in Ireland was 4.6 per cent in July.
Before the current spike in prices, the Central Statistics Office (CSO) published the CPI on a monthly basis and that stood as the uncontested measure of price growth here.
The CSO also produces – on a monthly basis – a different measure of inflation derived from a slightly different basket of items with different weightings called the HICP. This was produced for the European statistical agency Eurostat to allow it compare price growth across euro zone member states and generate a measure of inflation for the bloc as a whole.
When the focus on inflation reached fever pitch last year, journalists started looking at flash estimates of the Irish HICP number contained in the Eurostat figures and writing stories in advance of the CSO’s official CPI measure.
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Hence we ended up with two different inflation measures being published each month, posing something of a head-scratcher for readers.
For the first part of the current inflationary cycle both readouts were broadly similar, in that they both reflected an energy-driven price surge.
In April 2022, the CPI said prices here were rising at a rate of 7 per cent, while the HICP recorded a rate of price growth of 7.3 per cent.
But in recent months the two measures have begun to diverge, with the HICP falling quicker than the CPI, spurring optimism that inflation was being tamed at a faster rate.
If you had predicted last year that the economy would still be growing and at full employment on the back of nine consecutive interest rate hikes, you would have been dismissed as a crackpot
In June, the HICP recorded prices rising at an annual rate of 4.8 per cent, the first time inflation as measured by HICP had been under 5 per cent in more than a year and a half, while the official CPI measure was still more than 6 per cent.
This might seem like a statistical storm in a tea cup, but the recent divergence between the two measures reveals a crucial shift in the inflation dynamic here.
Because it excludes mortgage interest costs from its basket of prices, the HICP has fallen quicker than the CPI, which includes them.
On the back of nine straight interest rate hikes from the European Central Bank (ECB), mortgage interest costs have now overtaken energy prices as the main driver of inflation here.
In July last year, energy costs had risen by 56 per cent year-on-year compared to a 4 per cent rise in mortgage interest repayments.
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One year on and the equivalent figures were 16 per cent for energy versus 44 per cent for mortgages, reflecting the fact that as energy price pressures have eased, tightened monetary policies have become the main driver of price growth.
A recent report by the National Competitiveness and Productivity Council (NCPC) warned that the increasing number of fixed-rate mortgage customers in Ireland who will be forced to reset payments at higher interest rates could ensure inflation here remains higher for longer.
“Recently, upward pressures on energy prices have dissipated, but mortgage interest rates have moved ahead due to continued interest rate increases set by the European Central Bank,” the council said.
It warned that the current high rate of inflation – it was 5.8 per cent in July – may not come down as quickly as several forecasters, including the Department of Finance, are predicting, because of higher mortgage repayments and other factors.
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It noted that about 60 per cent of mortgage customers here are insulated from interest rate rises on account of their fixed-rate contracts. However, close to 10 per cent – or 56,000 mortgage customers – “will roll off their current fixed rate by end-2023 and will face the prospect of higher repayments [followed by a further 10 per cent by end-2024]”.
This would affect the CPI, it said. There were other factors likely to keep inflation higher for longer, it warned, including higher food prices linked to adverse weather conditions globally and domestically, and ongoing rental market pressures.
This warning runs in parallel with more hawkish soundings from the European Central Bank (ECB) and the Federal Reserve in the US, which have both warned of inflation staying “too high for too long” on the back of several factors, including tight labour markets.
If you had predicted last year that the economy would still be growing and at full employment on the back nine consecutive interest rate hikes, you would have been dismissed as a crackpot.
A strong labour market would normally be considered a good thing, but it’s not necessarily a positive in an economy that continues to struggle with high inflation, as employees can demand higher wages in a tight labour market.
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While rising wages are good for workers, the ECB is worried that if salaries increase too rapidly, it will maintain upward pressure on prices, especially in service industries where wages are the main expense for employers.
Consumer spending here has also been buoyed by Government supports and increased savings.
The first half of the ECB’s project of getting inflation back to its target rate of 2 per cent has been achieved with curiously little fallout for employment and consumption. The next phase might be prove problematic, however.
Equally, the squeeze from higher mortgage costs combined with higher energy bills could leave households more under the cosh than they were last winter.
