Dáil Éireann Debate, Tuesday - 21 September 2021
225. Deputy Bernard J. Durkan asked the Minister for Finance if inflation rates in Ireland are indicative of any particular vulnerabilities arising from Brexit or otherwise; and if he will make a statement on the matter. [45263/21]
View answerWhile Covid-19 had a deflationary impact last year, inflation has picked up since the beginning of this year. The annual rate of HICP inflation rate rose to 3 per cent in August – the highest rate since 2008. Similar trends have been observed across advanced economies, with inflation rates of 5.3, 3.2 and 3 per cent recorded in the US, UK and euro area in August.
The increase in inflation since the beginning of this year is largely explained by temporary factors, which are expected to fade over time. These include ‘base effects’ associated with the normalisation of oil prices following their collapse last spring as well as an imbalance between demand and supply following the re-opening of the economy. This has been compounded by supply chain disruptions, namely the availability of inputs (e.g. semi-conductors) as well as capacity constraints for shipping, and shifts in demand as the pandemic has boosted the demand for some durable goods and reduced the demand for others.
It’s possible that higher trade costs as a result of Brexit can in part explain the emergence of inflationary pressures in recent months. Indeed, non-energy industrial goods inflation which consists largely of UK imports, has picked up since January and various business surveys have cited Brexit related customs checks as a key driver of recent price increases. The uptick in the wholesale price index in recent months may in part be explained by Brexit.
The emergence of inflationary pressures has prompted a debate regarding the likely persistence of these price dynamics as consistently higher inflation could trigger monetary policy changes by the ECB, with implications for the cost of Government borrowing. Looking beyond the short-term, however, it seems likely that these temporary factors will fade as demand stabilises and supply pressures ease. Consistent with this view, the ECB recently reiterated that the current inflationary pressures are largely temporary and inflation in the euro area is still expected to remain below 2 per cent over the medium term. Nevertheless, my Department will continue to closely monitor and analyse inflationary developments and will publish updated inflation and economic forecasts alongside the Budget in the autumn.
