Inflation accelerates to 5% in June

The rate of inflation accelerated again last month to 5 per cent from 4.7 per cent in May, the Central Statistics Office (CSO) reported today.

Rising food and energy prices coupled with increases in mortgage interest costs have been the main drivers of inflation over the past year.

Last week the European Central Bank raised interest rates for the first time in more than a year to 4.25 per cent, a move which is expected to add approximately 0.6 percentage points to the annual rate of consumer price inflation (CPI).

However, the full impact of that change will not be reflected in the CPI until lenders pass on the increase to borrowers. That started to happen this week.

In the year to June, mortgage interest costs climbed by 17.2 per cent while rents increased by 7.8 per cent over the year. In June alone mortgage interest repayments rose 1 per cent.

The price of water, electricity, gas and other energy products have risen 11.1 per cent since June 2007 while food prices have increased by 7.3 per cent.

Flour prices have increased by over 39 per cent over the year, pushing the price of bread up 16 per cent. Milk, cheese and egg prices have risen 20.7 per cent in the year.

Last month, the cost of living increased by 0.3 per cent with increases in transport costs (up 2.1 per cent) and housing and energy costs (up 1 per cent) accounting for much of the rise.

Rapidly rising oil prices are now impacting throughout the Irish economy. In the year to June the price of home heating oil has risen by 56 per cent while the price of diesel has jumped 31.6 per cent. Diesel prices increased by 7.1 per cent in June alone.

In contrast, petrol prices increased by 12.2 per cent in the 12 months to June, and by 5 per cent last month.

Excluding mortgage interest, the underlying annual rate of Irish inflation quickened from 3.7 per cent in May to 3.9 per cent in June, the highest rate since August 2003.

The underlying rate of Irish inflation is broadly in line with the annual rate of price increase in the euro zone, where inflation was running at 4 per cent in the year to June.

Alan McQuaid, economist at Bloxham stockbrokers, said there was no respite from bad news in the Irish economy. He said the main factors contributing to the increase were higher petrol, diesel, and home-heating oil prices, as well as higher air fares.

Average mortgage interest repayments also rose in the month, as did the price of cigarettes, and the cost of eating out.

“Inflation, the curse of the 1970s, is staging a comeback, led by sky-high oil prices. This time though, the menace is more genuinely global than three decades ago, and this time much of it is 'Made in China'," he said.

He said Irish consumers have seen a constant headline inflation rate in and around the 5 per cent level for the past eighteen months, while at the same time economic growth slump dramatically.

He expects inflation to remain close to 5 per cent for the year while “real economic growth is likely to haven nosedived from 5.25 per cent last year to minus 2.5 per cent to minus 3 per cent in 2008, a clear sign of stagflation if ever there was one.”

Rossa White chief economist with Davy stockbrokers said three-fifths of the monthly increase in the CPI was due to rising energy costs, leading to an 11.4 per cent rise in airfares.

He said it was important that electricity and gas prices were not hiked significantly in October just as the economy will be contracting.