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Inflation in Ireland surged in March after huge price rises for home heating oils and motor fuels because of the Iran conflict. Indeed, oil prices drove all of March’s rise in inflation. Excluding energy, inflation fell back slightly. Ultimately, the two-week ceasefire, which prompted oil prices to drop, coupled with further cuts to motor fuels excise duty mean that inflation will probably ease a little in April. However, the outlook from here depends on if the ceasefire allows for traffic to begin flowing through the Strait of Hormuz again and if US threats to blockade the Strait and retaliation from Iran materialise.
Conflict in the Persian Gulf drives up inflation in Ireland
Inflation rose to 3.6% in March from 2.7% in February. Oil prices on their own drove this spike. Motor fuels inflation jumped to 10.6% from -3.1%, while home heating oils inflation surged to 63.3% from -7.3%. For heating oils, this was the strongest rate of inflation since September 2022.
In fact, outside of soaring oil prices there were some signs of Ireland’s inflation pressures easing. Inflation, excluding energy, eased to 2.8% from 2.9%. This was driven by slower services inflation. That said, disruption to supply chains from the closure of the Strait of Hormuz could spill over into stronger food and manufactured goods inflation later this year.
Fortunately, the recently announced two-week ceasefire, which led to a drop in energy prices, and the government’s decision to slash excise duty on motor fuels means inflation should ease back in April.
Ireland’s inflation outlook largely depends on ceasefire
The outlook beyond April depends on whether the ceasefire is effective at resuming transit through the Straits of Hormuz and whether both the US and Iranian threats happen. In the first instance, two weeks may not be enough time for many Gulf countries to restart shut-in production. Repairs to damaged energy infrastructure will also take months or years. This may limit the flow of petrochemicals from the region for longer. That, along with a heightened risk premium and ongoing uncertainty, will probably keep energy prices well above their pre-conflict levels for the rest of this year. This will further restrict the already-limited flow of energy out of the region and could push prices even higher.
The current tax cuts, including the additional 10c excise duty cuts announced over the weekend, are set to expire at the end of July. This will dampen inflation in April, but mechanically boost inflation in August. However, fuel prices could have eased a little by then. Delays to the carbon tax rise on heating oils and natural gas will also help to weigh on inflation until October, which is
when these measures are expected to be introduced instead of May as previously expected. However, if tensions flare again, then the government has some scope to extend these measures given its healthy budget surplus and public feeling around surging fuel prices, which prompted the latest additional measures. This would limit the impact on inflation from another price rise.
Ultimately, the measures announced by the government mean that inflation should fall back in April. What’s more, the Irish economy is entering the crisis in a much stronger position than many other European economies. The government’s strong fiscal position, healthy household balance sheets and high savings rates mean real economic growth should continue, despite elevated inflation.
