There’s a consensus among economists, and the figures back them up, that inflation has peaked. Not that the current price pressures, and associated erosion in buying power, are behind us, just that the highest rate of annualised price growth has probably already come and gone.
The latest flash estimate for Irish inflation from the Central Statistics Office (CSO) indicates prices here grew at an annual rate of 7.7 per cent in the 12 months to January this year, down from 8.2 per cent in December.
Eurostat figures for the euro area, due out on Wednesday, are expected to show a similar softening in headline price gowth.
The consensus, however, breaks down at that point. Some analysts believe we’ll see a return to more moderate price growth relatively soon (by the end of 2024) while others believe we will experience what’s known as sticky inflation. In other words, elevated price growth will linger in the system.
Christmas digestifs: buckle up for the strong stuff once dinner is done
Western indifference to Israel’s thirst for war defines a grotesque year of hypocrisy
Why do so many news sites look so boringly similar? Because they have to play by Google and Meta’s rules
Christmas dinner for under €35? We went shopping to see what the grocery shop really costs
The logic here is that price growth has passed from commodities such as oil and gas into services such as childcare and insurance, which translate more readily into wage demands, and which reverberates back into higher prices, keeping generalised price growth higher for longer.
The high priest of this analysis is Egyptian-American economist Mohamed El-Erian.
[ Cost-of-living crisis spoils Christmas for retailersOpens in new window ]
While the European Central Bank and the US Federal Reserve aim to bring inflation back down to a 2 per cent range, El-Erian believes this process, even with the impact of higher interest rates, might stall at around the 4 per cent range.
“Increasing wage pressure” is driving this change, he said in a recent article.
Does hybrid working and the tech slowdown mean we've reached 'peak office'?
An increase in office stock, the switch to hybrid working, as well as job losses in the tech sector have contributed to a slowdown in the Dublin commercial real estate market, according to industry expert, John Moran. The CEO of JLL joins Ciaran Hancock to discuss the 13% office vacancy rate driven partly by the increase in 'grey space.' The term is used to describe what is available for sub-leasing or assignment, more of which is being seen in the capital as Big Tech companies pull back to 2019 levels of employment. Meanwhile, Director of Technology Ireland, Una Fitzpatrick gives the industry view on the recent job losses. The Ibec branch wants to counter the narrative that the sector is in free-fall, noting these are the first redundancies of this level since 2010.With any subscription you'll get unlimited access to the very best in unique quality journalism from The Irish Times. Subscribe today.
“This transition is particularly noteworthy because inflationary pressures are now less sensitive to central bank policy action,” he wrote.
“The result could well be more sticky inflation at around double the level of central banks’ current inflation target.”
If he’s proved right, central banks will likely have to keep interest rates higher for longer, and that will have consequences for wages (nominal versus real), for house prices and for a myriad other variables in the economy. It also will drive many so-called “zombie” firms with high debt loads and weak cash flows out of business.
[ How the cost-of-living crisis will affect your grocery bill in 2023Opens in new window ]
More immediately, better-than-expected growth numbers for the euro area are likely to make the ECB less worried about the growth impact of higher interest rates and therefore more likely to press on with monetary tightening.
The bank is expected to hike interest rates by another 0.5 per cent on Thursday, the fifth increase in six months, placing further pressure on mortgage holders here.
