January inflation set to hit six-year peak

The rate of inflation will reach a six-year peak today, due to higher electricity prices and higher indebtedness, leading economists warned yesterday.

Although forecasts differ, most economists agreed that the consumer price index for January, to be published today, will show a marked increase in inflation from the 4.9 per cent rate recorded in December.

Today's inflation numbers are the first in five years to be reweighted, and economists said this could tend to increase future inflation figures somewhat.

"The rate of inflation is going to hit 5.4 per cent. That's a high level - its much higher than our trading partners," said Pat McArdle, chief economist with Ulster Bank.

While blaming external factors such as interest rate rises and energy cost increases, Mr McArdle said domestic factors had driven the core rate of inflation - which excludes interest rate effects - up by 1.5 percentage points in the last year.

"Budget increases in cigarette duties added 0.3 to inflation in December and this impact stays in January. But the biggest increase in January will come from electricity prices because the ESB got a 12.5 per cent increase from the regulator."

IIB Bank economist Austin Hughes said recorded inflation could be slightly higher as the cost of housing absorbs a larger amount of people's budgets.

"We have a revised basket for the CPI. If people are rational, economists would normally hold that consumers should substitute from expensive to cheaper goods, implying downward pressure, but the critical element is that the weight of housing should have increased."

Mr McArdle said this impact would depend on whether Central Statistics Office (CSO) accounted for longer mortgage repayment periods in the way it calculates housing cost figures.

"One would expect the proportion spent on housing to go up, but there might be upsets for example if they extend the notional mortgage repayment period from 20 year to 30 years," Mr McArdle said.

Mr Hughes said higher levels of indebtedness were magnifying the impact that interest rate increases have on inflation. "The recent increase shouldn't have an impact because there was a similar increase last year, but average debt levels have risen so this will put some upward pressure on inflation."

Rossa White, economist with Davy Stockbrokers, said January's inflation rate was more likely to be 5.2 per cent, but said that such an increase was still significant. "The index itself will be flat on the month but the year on year increase will be 5.2 per cent, the highest rate since June 2001."

Goodbody economist Dermot O'Leary said January's rate of inflation would remain unchanged. "I'm not in the doomsday camp. I think inflation is going to stabilise at the current and then fall thereafter."

The Economic and Social Research Institute predicted before Christmas that inflation would rise this year to 6 per cent due to ESB price hikes, increases in indirect taxes in the last budget and the impact of interest rate rises.

But Mr McArdle predicted that inflation peaked in January and was likely to fall coming closer to the election. "It's a fairly steady fall until June, when inflation should be running at around 4.5 per cent."

Indebtedness magnifying impact of rate increases