Irish Inflation Cruises Above the Speed Limit

Ireland's HICP rose by 0.4% in January, the same as its gain in February. Ireland is another piece in the puzzle that looks to discover what has caused this inflation; it is everywhere. Its domestic consumer price measure rose by 0.4% as well for the second month in a row\, but the core measure slowed to a gain of 0.2% in January after rising by 0.4% in December.

Overall inflation is trendless, but both the six-month change at 7.1% and the three-month pace at 5.8% are ahead of the year-on-year gain at 5.0%. The domestic CPI and its core have the same set of features with an acceleration over six months and slowdown over three months but with both the three-month and the six-month pace more than the 12-month pace.

However, the diffusion statistics are not worrisome. They show a breadth of inflation over 12 months (compared to 12-months ago) at 58.3. Over six months the diffusion measure that compares six-month to 12-month inflation is up to 0.66, which is a high reading for diffusion. That reading says inflation is accelerating in two-thirds of the categories. But then, over three months, which makes the comparison to the six-month pace, diffusion is only at 0.50, a dead neutral reading showing acceleration and deceleration forces are balanced.

Still, there are some trends by categories: alcohol and clothing & footwear both show steady acceleration in prices – for alcohol it's a strong move higher. Health care costs show a minor acceleration tendency, rising from a 1.1% gain over 12 months to flatten at a higher 1.5% pace over three months and six months. Education costs also step up steadily but still post the second slowest three-month gain among all categories. The lone steady deceleration in price is from the catch-all ‘other' category.

Four categories show weaker three-month gains than 12-month gains while one category shows the same pace for 12-months as for three-months. Seven three-month gains are at a pace that exceeds the 12-month pace. The headline shows a three-month gain more than the 12-month pace by 0.8%. For the domestic CPI the increment is only 0.4%, but for the core it is 0.9%- nearly one percentage point. The average gain across all components (unweighted) is 1% but the median is +0.4%. So, there is inflation in Ireland; it has accelerated somewhat broadly, but not all that strongly...yet.

On balance, Ireland does not seem to have virulent inflation problems. The 12-month acceleration compared to 12 months ago is large at +5.2% and the domestic headline echoes that number. But the domestic core rate accelerates by 2.3% year over year-ago. The headlines clearly show the impact of commodity and oil prices that are still gaining but not by as much. Core gains remain more muted, but will they continue or step up in the wake of those headlines? That's the issue.

Ireland poses the question of whether inflation is bad or was it bad? The three-month pace of 5.4% and 3.9% logged by the domestic headline and core, respectively, are well above target but do not look threatening. The momentum is not threatening either. The three-month diffusion is balanced.

Normally recessions cool the fires of inflation. But these fires are international in nature- we see them everywhere. While the politics in the U.S. blames fiscal excess and spending on the policies of Joe Biden, the truth seems much less accusatory and more global. Supply issues have taken prices to an unexpected level. Labor markets have seen workers withdraw for a variety of reasons related to personal fear, risk, or, in some cases, familial logistics. If Omicron remains as benign now that it has dissipated in many places, can normalcy be restored and will the public's trust be restored? Macron in France and Trudeau in Canada have each called out the unvaccinated as though they did something they had no right to do. Meanwhile, the benefits of vaccination seem to shrink day by day. Despite how politicians act, immunity is not one of the benefits. The virus and government reactions to it have divided many nations and the lasting damage from that is part of what must heal too. For many reasons, the outlook is clouded. But for the economy, one of the main things all countries need to see is the pressure gauge on inflation dialed down. If it won't dissipate on its own, then there is a lot of work central banks must do and that kind of work puts growth at risk. So, there was the recession phase, then the recovery phase of the virus, the more difficult phase may simply be the transition to continuing the expansion phase. That challenge lies ahead.