The Central Statistics Office (CSO) estimated that Irish inflation was at 3.3% in the 12 months to June, with consumer prices 0.3% lower than they were in May.

Looking into the data, the clear driver of the slowdown has been energy prices which were 1.9% lower than a month ago. However, those energy prices are still 10% higher than a year ago. The apparent resolution of hostilities in Iran have had an immediate effect on the price of oil on global markets, with benchmark Brent crude trading close to it pre-war level.

That reduction should continue to feed through to prices at the pump over the coming weeks, which would lead to further falls in energy prices. The agreement reached this week in Government to postpone the reintroduction of excise duties on petrol and diesel until 1 September, and to phase them in over a four-month period, means that price pressures from fuel will be limited over the coming months.

The CSO estimated that food price inflation over the past year has slowed to 0.7%, and that those prices dropped by 0.3% in the last month. Data on wider grocery price inflation released by Worldpanel by Numerator this week also showed a slowdown in grocery price inflation.

Along with food and fuel prices, June also saw a month-on-month drop in non-energy industrial goods. In fact, the only headline area which saw a price increase since May was the services sector which saw 1.1% inflation over the last month, and 3.6% inflation from a year ago.

This sector does put something on a dampener on the good news from the June reading. Services sector inflation measures price changes for non-physical, intangible, economic products, including hospitality, transportation, healthcare and professional services. A key difference between service sector goods and almost everything else in the inflation index is that services cannot be stockpiled, so the only way to avoid services bills is not to use the service at all.

Economists say that services inflation tends to be “sticky”, meaning that the pace of inflation tends to change slowly over time. Comparing services inflation with the overall Harmonised Index of Consumer Prices (HICP) we can see that the wider index is significantly more volatile over time than the services component (see Figure 1).

Policymakers generally look at services inflation to gauge longer-term economic trends. When the European Central Bank announced an increase in interest rates on 11 June, Christine Lagarde, president of the bank, described the move higher in services inflation as a “significant increase” but that they are confident that the increase, so far, has not been driven by wage increases, meaning that the price increases have not yet become self-sustaining. Near the start of the conflict in Iran in March, Lagarde outlined three possible scenarios for inflation. The first was that the shock would be limited and short-lived, the second was that the shock would produce a large, though not too persistent, overshoot in inflation while the third possible outcome outlined at the time was for inflation to rise significantly and durably above the ECB’s target.

Lagarde said that third scenario would require an “appropriately forceful” response from the central bank, a comment which was seen by economists to mean the bank would engage in a series of interest rate increases.

Clearly, the first scenario has been already missed. The rate hike by the ECB this month suggests the central bank puts the inflation outlook in the second scenario. If this proves to be correct, it will come as a relief to borrowers as it could mean that the central bank will hold of on more interest rate increases in the coming months.

Comment

After four months of considerable uncertainty over how global energy and wider inflation costs would develop, there has been a significant amount of good news in recent weeks which can give some hope that the worst of the input price pressures faced by farmers may already be behind us. As we noted last week, the cost of nitrogen fertiliser on global markets has tumbled. Add to that the drop in oil prices and the delay in the reinstatement of excise duties and, for the next couple of months at least, it seems that inflation pressures will ease.

If the trend continues over the medium term, it also means that the European Central Bank could hold off in driving interest rates higher. Again, this is good news for the Irish agricultural sector.

The ending of hostilities in the Gulf has also led to the US dollar strengthening against a range of currencies, including the euro. At the time of writing, a euro was worth $1.14 (Figure 2), the least in almost a year. This is good news for Irish exporters to the critical US market where the strong euro had meant reduced revenues from sales.

Time will tell whether any of these moves will stick for the medium term, but this week, the outlook is certainly brighter than it has been for some time.