Core inflation in State rises to 7.1% on back of higher mortgage costs

Inflation in the Irish economy fell for a fourth consecutive month in June but the drop was overshadowed by a rise in core inflation linked to higher mortgage costs and more expensive airfares.

The headline rate of price growth, as measured by the consumer price index (CPI), fell to 6.1 per cent last month, down from 6.6 per cent the previous month and from a peak of more than 10 per cent last October.

The Central Statistics Office (CSO) figures, however, indicated underlying or core inflation, which strips out volatile energy and food prices, rose from 6.8 per cent to 7.1 per cent in June.

The main driver was higher mortgage interest costs, which were up by 46 per cent on an annual basis, on the back of eight straight interest rate hikes by the European Central Bank (ECB). This is the most aggressive series of monetary tightening on record.

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ECB policymakers, who are expected to announce another rate hike later this month, are increasingly focused on core inflation, which remains elevated across the currency area.

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Higher transport costs, which rose by 2.5 per cent on a monthly basis in June, also drove the underlying rate of price growth in the Republic. This was linked to higher air fares, which were up by 34 per cent year on year. Higher prices in the recreation and culture sector, linked to more expensive package holidays and concert tickets, were also highlighted.

The CSO noted that prices here have been rising on an annual basis since April 2021, with annual inflation of 5 per cent or more recorded in each month since October 2021.

The most significant rises in the year were seen in the housing, water, electricity, gas and other fuels category, which was up 15.7 per cent. Within this, the cost of electricity and gas increased by 35 per cent and 47 per cent respectively.

Private-sector rents, meanwhile, were up by 7.7 per cent. The annual change in recreation and culture costs reflect a rise in price of package holidays (43.2 per cent), the CSO said.

Education (-6.3 per cent) and transport (-4.1 per cent) were the only divisions to show a decrease when compared with June 2022.

Inflation across the euro zone fell to 5.5 per cent in June. The ECB’s latest interest rate increase in June came with a warning that the bank’s unprecedented ramping up of interest rates was not over yet and that headline inflation across the bloc was now likely to stay above the bank’s 2 per cent target rate until at least the end of 2025, longer than previously anticipated.

The 0.25 per cent increase in June is being viewed by some investors as the penultimate hike in the current sequence, with a further quarter-point hike this month now priced in. This would lift the ECB’s main refinancing rate, the one that affects mortgages, to 4.25 per cent.

However, several analysts are predicting a further rate rise in September.