Finance | Extent to the which the country can withstand inflationary tendencies
To ask the Minister for Finance the extent, if any, to which he remains confident in this country’s ability to withstand inflationary tendencies; and if he will make a statement on the matter.
Consumer price (HICP) inflation picked up sharply over the second half of last year and stood at 8.3 per cent in May – a multi-decade high. Almost every advanced economy in the world is in the same position, with euro area inflation reaching a record 8.1 per cent in May.
The key driver behind the elevated level of inflation at present is the sharp rise in wholesale energy prices, food and other commodity prices since the onset of the war in Ukraine. Global supply chain disruptions, including the availability of inputs and transport bottlenecks have also added to inflationary pressures. The war in Ukraine and China’s zero-Covid strategy are compounding these disruptions. Domestically, the ongoing mismatch between demand and supply, including in parts of the labour market, continues to place upward pressure on prices.
Pass-through price effects from higher energy prices are already being felt in other sectors, such as food (via increased fertiliser and fuel costs) and consumer goods (via higher energy inputs). Indeed, the rise in non-energy or ‘core’ inflation suggests that inflationary pressures are becoming increasingly broad-based.
At the time of SPU 2022, the Department forecast average inflation of 6¼ per cent for this year. However, with many of the risks outlined in the SPU having already come to pass, there are upside risks to this projection. Needless to say, the war in Ukraine and in particular the escalation of sanctions against Russia will continue to shape the outlook for inflation over the short term.
The Government is acutely aware of the cost pressures currently facing households and businesses and has announced €2.4 billion in cost of living measures since last October to alleviate some of this pressure. However, the causes of current price pressures are not within our control. Whilst the Government will continue to help with the cost of living challenge, resources are limited and we cannot cushion households and businesses from the entire impact. Furthermore, in calibrating how we respond to the current challenges, it is important that we strike the right balance and ensure that policy doesn’t inadvertently add further inflationary pressures into the system. Finally, it is worth pointing out that monetary policy is the first line of defence against inflation. In this context, the European Central Bank has indicated a tightening of policy in the coming months. By slowing demand in the economy, this should help bring demand and supply back into balance, with positive implications for inflation.
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