Irish consumer prices fell by 1.2 per cent in tandem with the recent Brexit-related crash of sterling, according to an economics paper from the Central Bank.
The research, which assesses the impact of sterling volatility on consumer prices here, found that a 1 per cent fall in the value of the British currency could in turn see Irish prices decrease by 0.15 per cent over the course of a year.
It also warned of further knock-on effects here from shifts in sterling as the Brexit negotiations heated up.
The research comes as new figures show the State’s headline inflation rate falling to - 0.4 per cent in June. It had risen to 0.9 per cent, a four-year high, in April on foot of rising transport costs.
The Central Bank’s finding goes some way to explaining why Irish inflation
remained lower than all other euro area countries throughout 2016.
“Understanding the importance of sterling in driving consumer goods inflation is imperative, as forthcoming negotiations surrounding British exit from the EU are likely to have major consequences for the euro-sterling exchange rate,” the paper said.
The research said that exchange rate fluctuations affect consumers through two distinct price channels; the prices of imported final goods sold directly to domestic consumers, and the prices of imported inputs feeding through domestic production.
The Central Bank said that previous research suggested that within the euro area, Ireland was something of an outlier due to the extent of UK-based retail firms in the Irish market.
“Since these affliate companies are often price takers, in the sense that their prices are often set by parent companies in the UK, it follows that Irish consumer prices may have a close tie to UK consumer prices,” it said.
