In general, if higher inflation gives rise to higher interest rates it is likely that this would have some negative impact on US and UK growth and imports. However, there are many other factors which could offset or add to the adverse effects, such as changes in exchange rates, oil prices and consumer confidence.
US inflation was 3.1% in May 2004, up from 1.9% in January. The increase was partly due to the increase in oil prices. However, core US inflation, which is inflation excluding oil and food prices, was much lower, at 1.7% in May, less than half the rate of total inflation in the first five months of this year. There is no evidence that recent changes in US inflation rates have significantly impacted on the Irish economy to date.
While our short-term economic outlook is currently brighter than it has been for some time, there are still risks. The key risks are the possibility that US economic growth, burdened by twin deficits, might not be sustained into 2005 and that euro area growth will falter; that there might be further appreciation of the euro and further rises in oil prices; and that the increasing competition from abroad could give rise to job losses, particularly if pay increases were to exceed the levels just negotiated.
Any or all of these developments would be likely to impact on domestic output and jobs.