Mortgage interest rate rises to hasten return of inflation
INFLATION is likely to return by the end of the year, Bank of Ireland economist Dan McLaughlin forecast yesterday.
Ireland first experienced deflation in late 2008 and the consumer price index, the most commonly cited measure of inflation, tumbled 7.3pc by January of this year, Dr McLaughlin noted. Prices have been slowly rising since then although the annual rate remains negative.
"Ireland's experience of price deflation, which has lasted much longer than the euro norm, may have come to an end, judging from the recent trend," Dr McLaughlin wrote in a quarterly commentary on the economy. Despite a marginal decrease in inflation in June "we still expect the annual rate to have turned positive by year's end", he added.
The recent bout of deflation is the most severe since the foundation of the State. Some economists believe it is necessary to cut costs and increase competitiveness while others see it as a sign of economic weakness which, if prolonged, could cause long-term damage to the economy.
The shift from deflation to inflation will be driven by rising interest rates for mortgage holders, higher energy costs and small increases in the price of food, the bank economist forecasts.
Inflation is set to average 1.8pc next year and accelerate in the second half after annual deflation of 1pc this year and 4.5pc last year, the forecast adds.
Wage cuts have not been as deep as expected and have had less effect on inflation than first thought while the decline in sterling probably had a larger effect, according to Dr McLaughlin. The rise of sterling against the euro will add further inflationary pressures, he predicted.
Unemployment is seen peaking this year at 13.3pc before falling back to 12.8pc as unemployed foreigners leave the country to look for work elsewhere.
Dr McLaughlin kept his forecast for a 1pc increase in gross domestic product this year as exports continue to boom.