Inflation is falling - but here’s why things may not be getting cheaper

The latest numbers point to a drop in the headline rate but underlying price growth is still stubbornly high

Inflation is falling but that doesn’t mean things are getting cheaper, just that the rate at which prices are rising is slowing. In certain sectors, such as food, prices are still going up, a reflection of the higher input costs faced by producers.

Food inflation is a particularly subtle concept as it is spread across a myriad of smaller items, but it can be just as corrosive as higher energy costs or bigger mortgage repayments, particularly for low-income families which spend a higher proportion of their income in this area. It is estimated that the annual food shop is now costing families in the State up to €1,000 more than it did this time last year.

Combine that with higher energy, transport and mortgage costs and the squeeze on household budgets could be as much as €5,000 annually.

The latest EU Harmonised Index of Consumer Prices (HICP) for the Republic, collated by the Central Statistics Office (CSO), shows inflation in the Irish economy fell to 7 per cent in March, down from 8.1 per cent in February.


The drop in the headline rate was driven primarily by declining energy prices, which fell by 0.9 per cent on a monthly basis. Energy prices have the single biggest impact on inflation here and were enough to counterbalance a 1.1 per cent increase in food prices and a 0.6 per cent increase in transport costs (a product of higher air fares).

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While policymakers will welcome the direction of travel they will be concerned by a pickup in underlying inflation, which strips out energy. This measure of price growth rose to 6.3 per cent in March, up from 5.8 per cent in February, suggesting the second-round effects of the initial energy price surge related to increasing demand after Covid and Russia’s invasion of Ukraine is still playing out in other sectors.

“There are still few if any signs of any disinflationary process outside of energy and commodity prices,” ING’s global head of macro Carsten Brzeski said in response to the latest German inflation figures, also published on Thursday, which showed price growth in the Europe’s largest economy dropping to 7.8 per cent in March. But the fall was less substantial than analysts had expected and the underlying rate was still high at 5.8 per cent, potentially placing pressure on the European Central Bank to further tighten its monetary policy by raising interest rates.

Energy prices move up and down quickly, even if the pass through to consumers is more lagged. Prices in other areas are, however, slower to change, both on the way up and on the way down, for reasons to do with production and other factors such as just not being reset regularly. A prime example would be rents, which might be set once a year or once every two years.

In its latest commentary the Economic and Social Research Institute (ESRI) said it expected inflation to moderate “considerably” in the coming months due to falling energy costs, averaging 4.5 per cent this year. It had previously expected inflation to average 7.1 per cent in 2023.

While the more benign outlook for prices is certainly welcome, the institute warned that if core inflationary pressures begin to be replaced by second-round or wage-based price rises, “a higher-for-longer interest rate cycle would likely be followed to address this”.

Higher interest rates have already led to several high-profile blowouts, most notably Silicon Valley Bank and Credit Suisse, and the prospect of them being kept higher for longer is spooking markets.