The US was the first to experience this, with the latest data showing unexpectedly large monthly increases in core inflation, which excludes food and energy, leaving the annual rate stuck around 4.7%.
In February, the eurozone’s inflation data was also disappointing, with the annual rate of 8.5% being well above the projected fall to 8.2%. Even more worrying was the fact that the rate excluding energy jumped to 7.7%, while the main core rate moved up to 5.6%.
The Irish inflation rate increased to 8% in February, following a number of months of marked falls. Big jumps in food and transport prices were the main culprits behind the acceleration in Irish inflation last month.
However, the downtrend in headline inflation is expected to resume in the coming months due to base effects as the surge in energy prices last year following the Russian invasion of Ukraine drops out of annual rates. It is predicted that the Irish inflation rate will fall to about 6.5% in March and close to 4% by June.
The recent surprises in inflation, particularly with core measures, validate central banks’ warnings that it will take some time to bring inflation back down to 2%. It is expected that restrictive monetary policies will need to be kept in place for a considerable period of time.
Core inflation rates may take a long time to fall back due to two factors related to supply side constraints. Firstly, tight labour markets are already putting upward pressure on wages in many economies, especially in service sectors, where unemployment rates are at multi-decade lows in many countries amid sluggish growth in labour forces.
Even in Ireland, labour force growth in 2022 was entirely dependent on an influx of workers from outside the EU. Secondly, there are ongoing deficiencies in the supply side of economies, with weak output growth and strong demand, making a recipe for higher prices.
The transition to green energy is also a challenge that many countries are struggling to make. Housing markets in numerous economies also remain characterised by a marked shortfall in supply.
These supply side deficiencies at a time of strong demand could make it difficult for central banks to restore price stability. This points to a prolonged period of high interest rates. Oliver Mangan, chief economist at AIB, warns that it will be a tough challenge for central banks to restore price stability amidst these challenges.
