The latest inflation figures provide some hope that price pressures are finally easing. The estimate by the Central Statistics Office of the Irish inflation rate in March – using the EU measure – is 7 per cent, while across the euro zone the figure is 6.9 per cent. After disappointingly high readings in February, the March data came as a relief, though underlying price pressures, excluding energy prices, remain high. The ECB inflation target of 2 per cent still looks a long way off.
With wholesale energy prices falling, lower energy costs should start to pass through to consumers in the months ahead. However, food inflation remains high, increasing by 1.1 per cent in March alone and up 13.5 per cent in the past 12 months, While the full breakdown of the figures for Ireland has not yet been published, it is clear that over the past year food and energy prices have taken a heavy toll on Irish households. These are areas where less well-off households spend proportionately more of their income; they thus remain most exposed.
The precise track of inflation remains uncertain. Further sharp falls are likely as the year goes on, but inflation could get stuck above the EU target. Profiteering by some businesses is under the spotlight – research presented to the ECB suggests that profit margins in some sectors have been widening. The ECB will also watch for wage pressures.
Even the measurement of inflation at a time of volatility is challenging. Research reported in the latest ESRI quarterly commentary estimates that the real rate of inflation could now be lower than official measures show; time will tell, as the official figures should follow if this is correct.
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The fall in the inflation rate has implications for ECB policy. Another interest rate increase is expected in May, but falling inflation and fears of turmoil in the financial sector may mean an increase of just a quarter point. Given the lag before monetary policy fully impacts, the uncertainty about the inflation outlook and the warning signs in finance, the ECB would do well to tread cautiously.