Consumer prices exceeded analysts' expectations last month - rising by 0.5 per cent rather than an anticipated 0.3 per cent - despite large mortgage rate cuts, according to the latest data from the Central Statistics Office.
Annual inflation in the 12 months to the end of May rose by 1.5 per cent and by some 2.6 per cent when mortgage rate cuts are taken out of the equation. Analysts are pencilling in a headline inflation rate of about 3 per cent by the end of the year.
Dr Dan McLaughlin, chief economist at ABN Amro, said May was the second month that the consumer price index had come in above forecasts and that the figures were "a bit disappointing". There was some evidence, he added, that strong consumer spending was feeding through to price rises.
Drink prices, the cost of meals out, entertainment and package holidays all rose quite significantly, contributing to the CPI increase.
Drink prices are up some 5.1 per cent over the last year on the back of strong consumer spending, while services inflation generally - which includes entertainment and fees - was up 4.3 per cent. Other items such as sweets and chocolate are also on the way up and this, according to Dr McLaughlin, is probably also due to the weak euro.
Higher oil prices in recent months have begun to feed through, with petrol, diesel and home heating all on the increase. The euro has also been a factor in this regard - oil prices have risen a small amount in dollar terms but when measured in euros the increase has been far more substantial.
Dr McLaughlin is expecting inflation to go on rising through the year as the effect of mortgage rate cuts, begun in earnest last October, begins feeding out of the index. He is predicting inflation this year will average 1.9 but could be as high as 2.7 or 2.8 per cent at the end of the year.
Mr Alan McQuaid of Bloxham Stockbrokers also believes there will be sharp rise in the second half of 1999 with the average increase for the year at 1.7 per cent and a headline rate at the end of the year of possibly above 3 per cent.
