Inflation: Uncertain Trend

Figures for January show that inflation rose on both sides of the Atlantic making that the fourth month in succession that it has accelerated. Happily, the February preliminary figure for the EU shows a slight drop from 2.5% to 2.4%, Maybe the decline in inflation in most of 2024 heralds the end of inflation in the EU but the situation is less hopeful in the US. In Ireland the Consumer Price Index was up by 1.9% in January having been as low as 0.7% in October. However the flash estimate of inflation shows a drop of 1.3% in February from 1.7% in January.

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 2.5% at its March meeting – the sixth cut since June 2024. Inflation notwithstanding, Europe’s slow economic growth seems likely to prompt further slight reductions in the months ahead. In the US, despite the expressed preferences of the incoming administration, the January figure, together with ongoing evidence of strong economic activity was enough to prompt the Fed to hold interest rates steady at 4.25% at its February meeting. But there is now creeping doubts about the level of economic activity arising out of the administration’s tariff policy which may tilt the balance of opinion towards a cut in rates in the near future.

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 through 2024. But Transport inflation, after a steep fall in Autumn 2024 has jumped 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 rose sharply but have recently dropped back. Some easing of the geopolitical situation has helped. Oil has followed the pattern in recent months though more moderately.