Irish Inflation Flattens Out at High Pace

Ireland's inflation rate in November rose by 0.3% after surging by 1.5% in October and gaining 0.3% in September. There are hints here of inflation slowing since we have two moderate months, but there's a substantial increase between the two 0.3% increases in November and September that helps to drive the three-month annual rate up to an annualized 8.4%. That marks an acceleration from 8.3% over six months although it is slightly cooler than the 8.9% annual rate increase over 12 months.

Ireland's domestic inflation metric Ireland's domestic price index shows heated inflation with an 8.9% increase over 12 months, the same as the HICP total, carrying a pace of 8.8% over six months, above the six-month pace for the HICP, and rising to a 9.9% pace over three months that dwarfs the HICP three-month gain. The domestic index also offers up a CPI core measure that is a little bit more optimistic, showing a 5.5% gain over 12 months, rising to a 6.2% annual rate over six months but then falling to a 4.4% annual rate over three months. However, the CPI core is up 0.5% in November, by 0.5% in October and by 0.2% in September. It continues to run hot in recent months at a pace that's something more like a 6% pace, although the three-month pace is knocked down to 4.4% because of a relatively moderate result in September.

How broad is inflation? Ireland also offers some optimism on the front of diffusion. Diffusion measures the breadth of inflation acceleration from period to period. The diffusion values in the table show that diffusion over 12-months is at 75%. That means that over 12 months compared to 12 months ago, inflation is accelerating in 75% of the categories. Over six months, diffusion is down to 25%, telling us that only one quarter of the components of inflation are showing stronger inflation over six months compared to inflation rates over 12 months. Over three months, diffusion is still low, but ticks slightly higher to 33.3% indicating that one-third of the components are showing accelerated inflation over three months compared to six months. Diffusion values less than 50% indicate that inflation is accelerating and fewer than half of the category and that's good news. Diffusion gives us different results than the headline inflation measure because diffusion calculation treats all categories as equal without using any weighting. The headline inflation rate of course attributes weights and economic importance according to the category involved so there can be differences in diffusion and in overall inflation and its performance. But the idea behind diffusion is that if inflation is truly inflation, (a broad phenomenon, rather than driven by a few rogue categories), it should be infecting most of the components. Weighting may put a finer point on the pace of inflation but should not be a critical issue in detecting inflation. The Irish figures are reassuring because they show us that the breadth of inflation has narrowed quite a bit even though on a weighted basis inflation continues to run relatively strongly. The substantially lesser pace of core expansion adds to that sentiment.

Inflation across components When we look at the components in November, we get some sense of what's going on here with rent & utilities up at a very strong pace, rising by 0.7% in November and up by 8.1% month-to-month in October. This is a category with a very heavy weight and a very high inflation rate; it's one of the things that's driving inflation and causing the inflation numbers to be high even when the breadth numbers are not particularly menacing. Rent & utilities, for example, are up at a 46.1% annual rate over three months and rising at a 26.6% annual rate over six months. This is a category that's adding a great deal to inflation and its strong pace has been very stubborn.

On a quarter-to-date basis, inflation is not performing quite as well. These data are for November so we're looking at inflation for two months in the fourth quarter compared to the third quarter base. Viewed in this way, the HICP headline measures is up at a 9.1% annual rate, the domestic inflation rate is up at a 10.6% annual rate, and the domestic CPI core is up at only a 4.7% annual rate. Inflation in the headlines is still carrying a strong pace; the core is showing some significant temperance for inflation pressures in Ireland so far in the fourth quarter. In the fourth quarter, prices for clothing & footwear fall by -1.1%, education costs fall at a jarring -26.4% annual rate, restaurants and hotel prices fall at a -2.5% annual rate. However, rent & utilities are still rising at an enormous 54.4% annual rate in the fourth quarter lighting a fire under inflation, although because the category is rent & utilities it obviously has some energy mixed in with other housing cost measures- not all of it is in the core measure.

Summing up On balance, there some reason to be encouraged by the inflation numbers from Ireland. There are strong headline numbers, but we can be encouraged by the pattern of the overall price increases that shows some tendency for inflation to simmer down even though there are obviously some extremely hot pockets, particularly related to housing costs. The headline for Irish domestic inflation and for the HICP measure are sending very similar signals, but the domestic CPI core is especially good news despite running at a pace over twice what the central bank looks for when it seeks price stability.