Inflation: It Hasn’t Gone Away You Know

Figures for December show that inflation has risen on both sides of the Atlantic making this the third month in succession that it has accelerated. The hope that the decline inflation in most of 2024 heralded the end of inflation has been disappointed. In Ireland the Consumer Price Index was up by 1.4% having been as low as 0.7% in October. Happily, by international standards, that is still quite low.

In the US the rate rose by 0.2% from October to November to reach 2.9% in December. Markets took some cheer from the fact that some feared it might have been worse. In the EU, the rate also moved up 0.2% to 2.4%. In both areas, the index has now risen for each of the last three months. Only in the UK did the rate drop: it was down from 2.6% to 2.5%.

In both the EU and the US the inflation rate is outside the 2% target area set by the respective monetary authorities. This did not deter the ECB from reducing interest rates to 3.5% at its latest meeting – the fifth since June 2024. Further cuts have been signaled. In the US, notwithstanding the expressed preferences of the incoming administration, the December figure, together with ongoing evidence of strong economic activity was enough to prompt the Fed to hold interest steady at 4.25% at its January meeting with no indication that a cut is in prospect.

The second graph shows some detail on the Irish CPI. Inflation in the main upward influences at work in 2023 – housing, transport and food – have all weakened markedly. The Housing index is actually declining due to the fall in interest rates. But Food and Transport are still slightly ahead of the average. The most important factor, however, is services which has followed a different pattern to the general: rising in the early part of 2024, then falling, but now rising sharply again.

Oil and gas are critically important commodities and major influences on prices. In most of 2024, gas has been increasing in price while oil has been falling. Since the end of October gas futures have risen sharply. With the geopolitical situation very stressed, the winter on us and ending of Ukrainian transit of Russian gas further increases are likely.