Ireland: Inflation & Interest Rates

The above inflation chart for Ireland is a great illustration of how the prices of goods & services have changed over the last 5 years on a monthly basis.

Up until early 2021, the inflationary picture in Ireland was benign and rarely a topic of conversation. Inflation was something that was discussed in the context of the 1970s & 1980s. As you will see from the Inflation chart , Ireland (and the World) entered into a deflationary environment in 2020, mainly as a result of Covid-19 and the complete shut-down of activity. Governments and Central Banks then had to stimulate economies by implementing a loose monetary policy and by lowering interest rates to all-time lows. Ultimately, consumers & businesses were encouraged to speed up the flow of cash around the economy, thereby running the obvious risk of causing inflation.

In early 2021, we started to see the first signs that deflationary pressures were turning into a modest inflationary environment. It's worth pointing out that, at this time and for a certain period, the benchmark 10-year Government Bond Yields in the US and Germany were negative, and retail banks in Ireland were charging negative interest on deposits over a certain amount.

This was an extremely difficult and challenging market environment for savers & investors.

For 3 years from Spring 2021 to Spring 2024, we experienced an unprecedented rate of prolonged inflation globally. In Ireland, Consumer Price Index (CPI) as measured by the CSO was hovering just below the 10% annual rate for a lot of 2022 and into early 2023.

However, as it stands now in August 2024, it appears that inflation is finally under control and in line with the Central Banks objective and overall mandate. Just like Goldilocks doesn't want the porridge too hot or too cold, Central Banks need to have inflation not too hot or not too cold.

From a Financial Planning perspective, Irish Individuals & Families however now need to understand that, on average, prices of goods and services now are locked in at c. 30% higher than they were just over 3 years ago. We now need to readjust to this higher price floor, as it is unlikely in my view that prices will drop back down to the pre-Covid levels. This has a huge impact in terms of cashflows, as in most instances income levels haven't increased to the same extent.

The big questions now are: Where inflation will go from here (will it remain at the desirable 2%?) and how quickly Central Banks will lower interest rates to avoid economies slowing down too much.

Please feel free to reach out to Compass Private Wealth with any questions you may have in relation to your own Portfolio in the context of inflation & interest rates.

Author: Jonathan Sheahan, Managing Director of Compass Private Wealth with offices in Cork & Dublin