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Ireland’s rate of inflation rose from 1.7% in July to 2% in August, largely due to higher clothes prices as summer sales ended. Food prices also continue to put upwards pressure on the headline inflation rate. Looking ahead, we expect the rate of inflation to increase, spending the rest of the year above 2% as favourable base effects drop out of the annual comparisons and global food prices continue to rise.
Higher food and drink inflation has further to go
August’s inflation uptick was primarily driven by an 8.8% m/m rise in clothing and footwear prices. It followed heavy discounting in July, where prices fell by 6.3% m/m during summer sales to clear stock for new autumn lines. This boosted inflation in August by over 20bps and was the main reason for the month’s overall rise.
Rising food and drink inflation, which rose to 5.1% y/y from 4.7% y/y as agricultural commodity prices continue to push inflation up globally, compounded the upswing in clothing and footwear prices. Indeed, we expect food inflation has further to run before it peaks later this year as higher wholesale prices continue to make their way to supermarket shelves.
Recreation and culture partially offset the increase in inflation. Cheaper package holidays towards the end of summer saw this category knock 5bps from the headline rate.
Inflation will head towards 3%, but it’s not as bad as it looks
Looking to the rest of the year, we think inflation will edge closer to 3%, helped by rising food prices, until falling back into 2026.
However, much of inflation’s growth will be because the favourable base effects from big falls in energy prices this time last year will begin to drop out of the annual comparisons.
Under the surface, we think inflationary pressures in Ireland’s economy have actually eased, despite the measure’s movement towards 3%. Lower energy prices are helping to depress headline inflation. Services inflation, which is a better indicator of domestically generated inflation, also looks to have stabilised close to 2%.
What’s more, US tariffs, as well as weaker demand from elsewhere due to slower global growth, will suppress demand in the economy and help to limit some of the coming rise in inflation.
However, there’s still a risk that inflation picks up again more materially. Despite a rising unemployment rate, pay growth was still 5.3% in Q2. This means the labour market remains a source of inflationary pressure. The ECB’s deposit rate, at 2%, would also probably be too low to weigh on inflation in an economy that’s been running close to full employment.
The big risk is whether an expansionary budget in October stokes inflation by injecting more spending into a strong economy. Indeed, Gabriel Makhlouf, Governor of the Central Bank of Ireland, recently warned “for an economy operating at full employment, we’re adding more stimulus to the economy than it needs”.
All told, inflation was driven by food prices and unwinding clothing sales in July. Inflation will probably rise sharply over the rest of the year as big falls in energy prices drop out of the annual comparison and food prices continue to rise, but underlying inflation should remain under control.
