Irish Inflation... Pauses or Peaks?

Irish inflation gained 0.3% on its HICP measure in February; that's down from 0.4% in January and level with December’s 0.4% gain. Year-over-year Irish inflation is running 5.7% and increases to a 6.7% annual rate over six months but falls back to a 4.2% annual rate over three months. Ireland's domestic CPI measure tracks the results for the HICP monthly; the sequential trend is also very similar to what the HICP posts over 12 months, six months and three months. On balance, Irish inflation appears to have stopped accelerating, but it isn't clear whether this is a pause or whether there's more to come.

The domestic CPI measure has a core rate available. The core rate for Ireland shows a 3.7% gain over 12 months, a 3.3% annualized gain over six months, and that pace ticks up to 3.5% over three months. For Ireland, the core inflation performance is relatively flat and there is a hint that inflation may be stable in the neighborhood of 3.5% (still well above the ECB’s 2% objective for inflation in the EMU area). However, it's still hard to tell and certainly hard to tell with so much pressure still present in the headline and with global oil prices and commodity prices showing so much pressure and volatility themselves. On a quarter-to-date basis, the HICP for Ireland is up at a 4.8% annual rate (that's two months into the quarter). The domestic CPI measure is up at a 4.7% annual rate QTD, nearly the same as for the HICP. However, the core CPI is up at only a 1.7% annual rate in the unfolding quarter which is not only mild but it's within the overall target band sought by the European Central Bank. Can things really be that good this soon?

Is the Irish CPI smiling? The domestic Irish CPI shows 11 major components for inflation; these show the annual inflation rate is up with a breadth of 66.7%. That kind of diffusion (approximately acceleration in two-thirds of the CPI categories) is quite high and disturbing. Over six months, the diffusion ranking falls back to 58.3%, still showing acceleration with uncomfortable breadth. However, over three months, the diffusion measures steps back to 41.7% to accompany its milder pace. That's below the 50% mark and 50% is the dividing line between inflation accelerating or decelerating. Over three months, inflation is decelerating in more categories than it's accelerating and for Ireland this is a potentially significant result and potentially a signal that inflation it's not pausing before accelerating but is pausing because it's not going to be accelerating.

Extreme price moves over three months Still, there's still plenty of inflation in Ireland and a lot of categories that are quite troublesome. For example, prices for alcohol are increasing at a 27.8% pace over three months. Rent and utilities as an aggregate category shows inflation up at a 9.9% annual rate over three months. The recreation and culture category shows inflation at a 5.6% annual rate over three months; food prices are up at a 6.8% annual rate over three months. Balancing those clear excessive gains are communication where prices are declining at a 3.9% annual rate, education where prices are falling at a 3.7% annual rate, and the catch-all ‘other’ category where prices are declining at a 4% annual rate.

Summing up On balance, Ireland gives some reason for hope on the inflation front. The core rate seems to be stabilizing and even the headline rate has backed off from its greatest gains. However, there are still lots of difficult things to be dealt with: there's still a virus circulating, there's a war in Ukraine, oil prices continue to flare as do commodity prices, and globally labor markets have been tight with wage inflation more prevalent than it's been in the past. The state of global supply chains remains a question mark. There's a reason to be concerned about the degree of international cooperation and competition But as a bit of incoming news, the Irish inflation report for February is welcome.