Inflation in Ireland has been subdued for several years. Based on the Harmonised Index of Consumer Prices (HICP) inflation was just 0.3 per cent in 2017, this marked the fifth consecutive year in which inflation has been below 1 per cent. The subdued level of inflation has continued into 2018, with average inflation of just 0.7 per cent in the first ten months of the year. By contrast, inflation across the euro area accelerated to 1.7 per cent over the same period.
The divergence between inflation in the euro area and Ireland can in part be attributed to the impact of euro-sterling appreciation on consumer prices in Ireland. In turn this reflects the importance of the UK as a source of imports of consumer products, which have fallen in price recent years as a result of the appreciation.
While overall inflation has been subdued, services inflation has been relatively robust, averaging 1.6 per cent in the first ten months of the year. One important factor driving the increase in services inflation is strong growth in residential rents. Annual rent inflation averaged 6.4 per cent in the first ten months of the year.
The pace of growth in rent prices, which in part reflects the ongoing shortage of housing, is a concern. Although rental market policy is primarily the responsibility of my colleague the Minister for Housing, Planning and Local Government, the rapid growth in rents has implications for the macroeconomy and as such my Department continues to monitor inflationary tendencies in the residential rental market on an ongoing basis.
The Government’s primary response to mitigating rental inflation is to increase the supply of residential property. ‘Rebuilding Ireland: An Action Plan for Housing and Homelessness’ sets out a comprehensive package of actionable measures designed to restore the housing market to a sustainable equilibrium. The construction sector is expanding strongly, and this is now feeding into the growing supply of residential property. New house completions in the four quarters to Q3 2018 are up 33 per cent to 17,161, while planning permission for 26,855 new units was granted in the four quarters to Q2 2018, up 39 per cent year-on-year. Over time, the growth in housing supply will mitigate the pressure on residential rents.