Irish Inflation Surges Then Lingers

The HICP inflation rate in Ireland fell by 0.3% in December after rising 0.3% in November and gaining 1.5% in October. The domestic CPI index followed the same pattern except for the gain of 1.8% in October. The domestic CPI index for the core showed a 0.3% gain in December, a 0.5% gain in November and a 0.5% gain in October. While there's some evidence of a break in inflation in October, the drop hasn't been enough to reduce the pace of inflation although the more moderate seeming consistent increases in the rate of inflation on the CPI core shows some very modest deceleration over three months.

The trends: The sequential inflation rates from 12-months to six-months to three-months show the HICP total inflation rate at 8.2% over 12 months, falling back to a 4.7% pace over six months, then reaccelerating to a 5.7% pace over three months. There is a net reduction from 12-months to three-months. The domestic measure of inflation is quite similar with an 8.1% 12-month gain, a moderate 5.2% six-month gain and an annual rate expansion of 7.2% over three months that is only slightly weaker than the 12-month pace of 8.1%. The domestic core CPI grows at a 5.4% annual rate over 12 months and over six months and then decelerates to a 4.8% annual pace over three months. There is some true deceleration in the core. On the other hand, it's small following only by six-tenths of one percent on an annualized three-month inflation rate.

Inflation’s breadth: Looking at inflation diffusion, we see that the inflation rate for 12-months compared to the 12-month period of one-year ago has a diffusion reading of 58.3, which indicates that inflation was rising in more sectors than it was falling since the diffusion index is above 50 (above 50%). However, over six months the diffusion index is at 41.7%, indicating deceleration because inflation is lower over six months compared to 12 months across more than half the CPI categories. Over three months there's a further step down and the diffusion index falls to 25%; this reading shows that across the various categories, inflation was rising in three-months compared to six-months in only 25% of categories.

Breadth vs. the headline and core metrics: While inflation itself has not changed very much and while its deceleration on the three-month pace compared to the 12-month pace is somewhat uneven across the headline and core measures, the breadth of the fall across CPI categories is relatively wide. The reason that headline inflation doesn't fall as much as the breath statistics seem to indicate has to do with the weighting of the CPI. Those components that are showing acceleration have larger weights than those that are showing deceleration; therefore, a broader-looking deceleration measure is not to reflected the headline or core as much. Still, this is solid evidence that inflation is being tamed; that monetary policy is having an impact.

And in the quarter to date, which is now a complete statistic for the fourth quarter compared to the third quarter, we see the inflation metrics are still relatively high. The HICP total inflation rate is at 7.2%. The domestic headline inflation rate is at 8.5% and the core inflation rate is at 4.6% - all are ‘too-high.’

Summing up: So, the performance of inflation in Ireland shows more progress on the disinflation front than charts or tables of data will reveal. It's only by looking at the details that we begin to notice that inflation's breath has pulled back and has pulled back over a relatively wide range of items. Core inflation is still running far too hot, headline inflation is hotter still; however, there is progress being made below the surface. There remains the question of whether this progress will continue and that's a question about how growth evolves, as well as a question about global oil and commodity markets that are still up in the air with war raging in Ukraine and with China having ended its zero COVID policies. Both of those events could wind up putting more pressure on oil and other energy prices. For now, this report offers hints of good news but still embodies headlines that will put pressure on the central bank to continue to fight the fight against an inflation rate that is much higher than desired.