Inflation has softened but prices are still growing

The softening of headline inflation here and across the euro zone is of course good news for consumers but the squeeze on incomes hasn’t gone away.

While price growth isn’t increasing and the drop across Europe will pave the way for an expected interest rate cut by the European Central Bank (ECB) in June, prices on average are still rising.

Irish inflation, as measured by the harmonised index of consumer prices, was put at 1.7 per cent in March, the lowest annual rate recorded in nearly three years. This fed into a harmonised index of consumer prices for the euro zone of 2.4 per cent, lower than the 2.5 per cent expected.

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All barometers point to an inflationary crisis that is in retreat but also one that has resulted in a permanent jump in prices in many areas.

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Energy prices, the main driving force behind the lower inflation readings, are still 80 per cent above what was considered normal just a few years ago. Similarly, food costs have increased by around 20-25 per cent over the past 2½ years. Health insurance costs have also risen on the back of medical cost inflation and other factors.

Locally reduced excise duty rates on petrol and diesel, a key plank of the Government’s cost of living package, have also been partially removed.

So while consumers can cheer the trajectory in price growth, they won’t be feeling much in their pockets. It could easily take another two or three years for consumers to regain the purchasing power that they lost since the cost-of-living crisis began.

The ECB is expected to start cutting interest rates in June. Markets expect the bank to implement three or four cuts this year, adding up to a cumulative 1 percentage point reduction in interest rates before the year is out. The pass-through to consumers here, if the previous period is anything to go by, might not be as straightforward.

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