Stubborn core inflation in Republic and euro zone a worrying sign for ECB

Latest flash estimate indicates rate in State declined to 4.8% in June, down from 5.4% in May

The latest consumer price index data for May put inflation in the Irish economy at 6.6%. File photograph: EPA
The latest consumer price index data for May put inflation in the Irish economy at 6.6%. File photograph: EPA

Headline inflation in Ireland and the euro zone is coming down but underlying price growth remains elevated, keeping the pressure on the European Central Bank (ECB).

According to the latest harmonised index of consumer prices (HICP), Irish inflation fell to 4.8 per cent in June, down from 5.4 per cent in May.

The headline rate here slowed on the back of significant slowdown in food price inflation. Food prices increased by just 0.2 per cent in the last month compared to a hike of 10.1 per cent in the last 12 months.

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More of a worry for policymakers, however, was the fact that underlying, or core, inflation — a price gauge that excludes volatile items like food and energy -remained unchanged at 5.7 per cent.

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The latest HICP figures for Ireland were published alongside those for the euro zone as a whole, which showed a similar pattern. The figures indicated inflation across the trading bloc fell for a third straight month in June as the cost of fuel fell and increases in food prices slowed. However, underlying inflation dropped only marginally from 6.9 per cent to 6.8 per cent.

That is a reading unlikely to sway the ECB from another expected interest rate hike next month, the ninth since July last year.

Headline inflation in the 20 countries that share the euro fell to 5.5 per cent this month from 6.1 per cent in May, a slightly bigger drop than forecast by economists, with Germany the only country to report an increase, Eurostat’s flash estimate showed.

But the marginal drop in core inflation, which ECB policymakers see as a better gauge of the underlying trend, is far from the sustained drop the central bank wants to see.

Services were the only category where price growth accelerated — to 5.4 per cent from 5 per cent — demonstrating the continued resilience of consumers to higher borrowing costs.

September rate increase?

The ECB raised interest rates to their highest level in 22 years this month as it predicted inflation would stay above its 2 per cent target through the end of 2025. While policymakers are almost certain to raise rates again next month, speculation is mounting the ECB will opt for a further rate hike at its meeting in September.

Underlying price growth has been a key focus for ECB policymakers amid concern the initial price surge has spread out to other parts of the economy and may be driving higher wage demands. The ECB has warned it will keep raising interest rates as long as core inflation is rising.

While the HICP is used to allow comparisons across euro zone countries, the official measure of Irish inflation is the consumer price index. The latest index data for May put inflation in the Irish economy at 6.6 per cent.

Eoin Burke-Kennedy

Eoin Burke-Kennedy

Eoin Burke-Kennedy is Economics Correspondent of The Irish Times