Headline inflation in the Irish economy accelerated sharply in March as war in Iran sent energy prices spiralling. This was in spite of a reduction in food prices of 0.3 per cent when compared with February.
The latest Harmonised Index of Consumer Prices (HICP) indicated that prices rose at an annualised rate of 3.6 per cent in March, up from a rate of 2.5 per cent in February.
The jump was driven by energy prices, which rose by 11.1 per cent in the month and were up by 12.3 per cent over the 12 months to March. These figures were compiled in the middle of March, before the Government reduced fuel excise duties and introduced other measures to alleviate the impact of rising oil prices for businesses.
According to Davy, in the absence of war in the Middle East, Ireland’s headline inflation would likely have declined to about 2.3 per cent in March.
The latest estimate of price growth comes at a pivotal moment for the global economy, with conflict in the Middle East threatening a massive energy price shock on a par with that experienced in the 1970s.
Iran’s effective closure of the Strait of Hormuz has halted global shipments of oil and gas through the channel, triggering a sudden surge in energy prices.
Brent crude, the global benchmark, rose more than 3 per cent on Monday to top $116 (€101) a barrel.
Eurostat will publish a flash estimate of inflation for the euro zone for March on Tuesday.
Are Government’s fuel measures betting on a quick resolution to the conflict in Iran?
Food prices in Ireland are estimated to have fallen by 0.3 per cent in the past month, but increased by 2.3 per cent in the past 12 months. Food prices were a big pressure point for households for most of last year, but supermarket retailers have begun to reduce the price of key staples, including butter and milk.
In month-on-month terms, consumer prices in March accelerated to 1.8 per cent, more than double the 0.8 per cent increase in February.
Davy noted that core inflation, which excludes energy, food, alcohol and tobacco, remained at 2.7 per cent year-on-year. This was above its expectation that it would decline to 2.4 per cent.
The head of the European Central Bank (ECB) warned last week that it stood ready to increase interest rates even if an expected jump in euro zone inflation proves temporary.
ECB president Christine Lagarde said a “not-too-persistent” rise in inflation could trigger a hike after the bank was forced to upgrade expectations for euro zone inflation, which is now forecast to rise above the 2 per cent target.
“If the shock gives rise to a large, though not-too-persistent, overshoot of our [inflation] target, some measured adjustment of policy could be warranted,” she said.
Last week, the OECD warned that the Middle East crisis would fuel a surge in US inflation to 4.2 per cent this year, the highest in the G7. The Paris-based organisation predicted that energy price rises would sharply increase inflation around the world, with “significant downside risks” to growth if disruptions to energy exports worsened.
While the OECD expects US inflation to jump from 2.6 per cent in 2025, countries including China, South Korea and India also face a sharp increase in price growth because of the energy shock. – Additional reporting: Financial Times