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We expect CPI inflation to rise from 3.7% to 4.1% in September. This will be driven by continued jumps in fuel prices, especially diesel, as higher oil prices and tight refining capacity continue to push up prices. Further ahead, inflation is likely to keep edging up as utility bills reset higher in October and indirect energy effects add to airfares, manufactured goods and food inflation. This will result in inflation peaking at 4.5% in the new year, with the risks skewed to an even bigger rise unless the government announces further cost-of-living measures in the Budget next week.
Fuel prices to lift inflation above 4%
The main upwards driver of inflation in September will come from oil prices as heating oil and motor fuels prices continued to rise sharply due to low refining capacity and renewed tensions in the Middle East. What’s more, diesel prices are now averaging €2.12 per litre, close to the €2.18 per litre peak in April which prompted the government to slash fuel excise duty which means we think Tánaiste Simon Harris is likely to push any reversal of those measures into 2027 in Tuesday’s Budget.
Elsewhere, we expect services inflation to take a step up from 4.0% to 4.4%. On the details, we expect a jump in airfares inflation as prices fall by less than usual in September as airlines try to protect their margins from higher jet fuel prices. Similarly, mortgage interest inflation will continue to trend up off the back of another ECB rate hike and a continued rise in market interest rates, which set the price of fixed mortgages.
Further ahead, we expect utility bills will continue to reset higher, keeping energy inflation sticky throughout 2027. At the same time, the sustained rise in energy prices this year means it’s increasingly likely that food, manufactured goods and other energy-intensive services such as airfares inflation all pick up pace in the coming months. Indeed, we expect the former to rebound sharply from almost 0% currently to around 3% by mid-2027 as El Niño damages crop yields and adds to the pressure from higher energy prices. Together, this will drive inflation to a peak of around 4.5% in January and February.
Ultimately, we think inflation took another big jump upwards in September and will keep rising over the rest of this year before peaking around 4.5%. That said, the risks are still skewed towards even higher inflation, natural gas storage across Europe is low which means a cold Winter could see stocks depleted quickly at which point prices would surge as countries return to the spot market. In any case, the more persistent shock means that inflation will remain above target until early 2028.
