Inflation rises for fifth month in a row

INFLATION ROSE for the fifth consecutive month in June, as inflationary pressures arising from external factors such as very …

INFLATION ROSE for the fifth consecutive month in June, as inflationary pressures arising from external factors such as very high energy and other commodity prices pushed the rate of the annual Consumer Price Index (CPI) up to 5 per cent.

Prices rose by 0.5 per cent from May to June, driven by increases in two sectors - housing and transport.

Transport rose by 2.1 per cent due to increases in airfares and higher petrol and diesel prices, while higher average mortgage interest repayments and further increases in the cost of home heating oil pushed up the other sector.

On a more positive note, food prices fell for the first time since November 2006, down by 0.1 per cent on May, which meant that the annual average rate of food price inflation also declined, down from a high of 9.6 per cent in March to 7.3 per cent.

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Moreover, Rossa White, an economist with Davy Stockbrokers, said that food prices might ease further later in the summer, "bar any more weather shocks".

However, food prices remain very high and food inflation still accounts for almost a fifth of the annual increase in the CPI, despite the fact that it accounts for just 10 per cent of the basket, and a decline in international commodity prices will be essential to any deceleration in the rate of inflation.

The EU Harmonised Index of Consumer Prices (HICP), which is a better measure of internationally comparable inflation, rose to 3.9 per cent in June, just below the Eurozone flash estimate for June of 4 per cent.

At the launch of the Central Bank's annual report yesterday, Governor John Hurley expressed concern over the impact inflation was having on Ireland's competitiveness and he said that a realistic approach to wage determination by "everyone" will be an essential element in improving competitiveness.

Of the European Central Bank's recent 25 basis point rate hike he said: "Our approach is to take action now to keep inflation expectations in line with the definition of price stability, preserve purchasing power in the medium term and, thereby, support employment and growth across the euro area."

Dermot O'Leary, chief economist with Goodbody Stockbrokers,has predicted an average rate of inflation of 4.5 per cent for 2008, while Pat McArdle, chief economist with Ulster Bank, forecast an average CPI rate of 5 per cent for this year.

Looking into 2009, inflation moderation seems to be on the horizon.

Mr O'Leary sees the CPI falling back to 2.2 per cent in 2009 "as Irish inflation returns to a more normalised pace of increase", while Mr White said he expects inflation to decelerate towards 2 per cent "as significant spare capacity opens up". However, in his speech, Mr Hurley did add the caveat that, "such an outcome is not guaranteed and will require concerted action".

Fiona Reddan

Fiona Reddan

Fiona Reddan is a writer specialising in personal finance and is the Home & Design Editor of The Irish Times