Inflation in Irish economy falls to 5.4% but underlying price growth remains strong

Headline inflation in the Irish economy fell to 5.4 per cent in May on the back of falling energy prices, according to the latest harmonised index of consumer prices (HICP). This compares to 6.3 per cent in April and an annual increase of 7 per cent in the euro zone in the same period.

However, core or underlying inflation, a price gauge that excludes volatile items like food and energy, rose to 5.7 per cent, keeping the pressure on households.

Underlying price growth has been a key focus of European Central Bank (ECB) policymakers amid concern the initial price surge has spread out to other parts of the economy and may be driving higher wage demands. The ECB has warned it will keep raising interest rates as long as core inflation is rising.

The latest flash estimate of HICP for Ireland, compiled by the Central Statistics Office (CSO), indicated that energy prices fell by 3.1 per cent in May, but were still up 1.9 per cent on an annual basis.

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Food prices were estimated to have increased by 0.4 per cent in the past month, and to have risen by 12.5 per cent in the last 12 months.

Eurostat will publish flash estimates of inflation across the euro zone on Thursday.

While the HICP is used to allow comparisons across euro zone countries, the official measure of Irish inflation is the Consumer Price Index (CPI). The latest CPI for April put inflation in the Irish economy at 7.2 per cent.

Euro zone inflation unexpectedly accelerated to 7 per cent in April, up from 6.9 per cent in March.

Inflation has been above the ECB’s 2 per cent target for nearly two years and the bank has lifted interest rates by a combined 375 basis points since last July to arrest runaway price growth. Markets see the ECB’s 3.25 per cent deposit rate rising to just below 3.75 per cent this summer but some policymakers have already warned that this may not be enough.

Services inflation, which is primarily driven by labour costs, accelerated to 5.2 per cent from 5.1 per cent, confirming policymaker fears that nominal wage growth could become dangerously fast.