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Inflation fell to 1.7% in July, down from 1.8% in June, as services disinflation continued. However, the drop was partially offset by increasing food and energy prices. Looking ahead, we expect inflation to pick up to 2–3% over the autumn, where it will stay for the remainder of this year. While the European Central Bank’s (ECB) sounds comfortable keeping the deposit rate at 2% – lowering the risk to domestic inflation – we still expect one more cut later this year, which could risk overheating the economy.
How rising food prices are driving up the cost of living
Retailers heavily discounting clothing and footwear to clear space for autumn clothing lines meant prices fell 6.3% in July alone. This pulled the annual rate of inflation for clothing and footwear down to -2.4%. Airfares also knocked 5bps off the headline rate of inflation as prices rose by only about half as much as they did last July. Additionally, falling recreation and culture inflation should help to ease woes about the price of a night out. Here inflation fell to 2.3% from 3.5%, which knocked 10bps off inflation.
However, these gains were largely offset by rising food and drink prices. The annual rate rose to 4.7% as rising agricultural commodity prices continue to make their way to supermarket shelves.
What’s more, household energy inflation turned positive for the first time in nearly two years. This rose to 0.6% y/y from -0.5%. Add in fuel prices at the pump, which increased over 2% in July alone, and energy products boosted inflation by 13bps.
Will tariffs and the budget impact inflation?
Looking ahead, we expect inflation to rise above 2% and towards 3%. There are a few reasons for this.
First, wage growth remains over 5%. We also suspect the domestic economy did fine in Q2, despite the uncertainties of US tariffs. We think disinflation could stall as domestic firms, such as restaurants, deal with rising input costs from rising wages, food and energy prices and are able to pass on those price increases against a background of resilient demand.
Second, the government announced a €9.4 billion tax-and-spending package for next year in its Summer Economic Statement, which sets the scene for Budget 2026. However, for Gabriel Makhlouf, Governor of the Central Bank of Ireland, this comes with the risk that “for an economy operating at full employment, we’re adding more stimulus to the economy than it needs”. Were a big fiscal stimulus to cause the economy to overheat by boosting demand, then inflation would pick up further in 2026.
Third, despite the ECB entering “wait-and-see mode” according to President Christine Lagarde, we still expect another 25bps cut to the deposit rate, which would probably put interest rates into accommodative territory for the eurozone as a whole. Given Ireland’s outperformance, we think lower interest rates also risk overheating the economy.
That said, a 15% baseline tariff, coupled with the likelihood of pharmaceutical tariffs, would be disinflationary for the Irish economy because tariffs weigh on demand, which could open up a degree of slack in the labour market. In this scenario, inflation is likely to be lower.
Ultimately, we continue to expect inflation to climb back over 2% later this year as the risks remain tilted towards higher inflation. Strong wage growth, expansionary fiscal and monetary policy alongside rising food and energy prices all point towards higher inflation.
