Linkedin
Facebook
Email
more
Ireland’s rate of inflation jumped to 2.7% in September, up from 2% in August. This was largely thanks to favourable base effects dropping out of the annual comparison, which pushed up both energy and transport inflation. The inflation rate is likely to stay above 2.5% until the end of the year, before falling back towards 2%.
What’s driving inflation in Ireland?
As we predicted in our commentary on last month’s data, inflation rose strongly in September. It was the transport sector that played a big role in driving the 0.7ppts rise, adding a little over 45bps to the overall rate.
Airfares jumped from -13.6% y/y in August to -2.1% y/y this September because last September’s huge 23.3% m/m fall in prices has dropped out of the annual comparison. Fuel inflation turned positive for the same reason, rising to 0.3% y/y from -2.1% y/y last month, despite prices falling on the month.
Childcare costs also added to the outsized impact of base effects on the latest inflation data. Last year, September saw the government slash childcare fees through the national childcare scheme. The effect of this one-off reduction fell out of the calculations for the yearly comparison this month. It prompted the cost of childcare to rise 3.8% y/y from -19.3% y/y in August 2025, adding 14bps to Ireland’s inflation rate.
The good news is that food inflation fell back to 4.7% y/y from 5.1% y/y as prices were down 0.2% on the month. This should provide some respite for households and hospitality firms dealing with surging food inflation this year.
When will Ireland’s inflation rate come down?
Looking ahead, we think the headline annual inflation rate is set to stay above 2.5% until the end of the year, when it will drop back towards 2%. A number of factors now weigh on inflation.
First, global commodity prices suggest the recent surge in food inflation is near its peak. In fact, given September’s drop, it could have already peaked. Second, energy prices should fall over the coming months. Third, a stronger euro will continue to weigh on import prices. Finally, US tariffs will put downwards pressure on global demand and continue to depress sentiment. This, in turn, will impact inflation through weaker demand.
Will Budget 26 boost Ireland’s inflation rate?
However, these factors are driven more by international movements than domestic inflationary pressures. It’s here we think the inflation outlook is significantly stronger. Indeed, services inflation will probably stay closer to 3% y/y than 2% y/y next year as stubbornly strong wage growth of 5.3% y/y feeds into prices.
There are also a few risks that could keep inflation elevated. First, the government’s recent Budget 26 set out a €9.4bn fiscal expansion, most of which will go towards day-to-day spending. Given Ireland’s economy is already growing at its sustainable speed limit and the labour market is close to full employment, there’s a clear risk that government spending overheats the economy, pushing inflation up.
That said, the government has taken certain measures that will help weigh on inflation. For example, the VAT cut for food-led hospitality should help to curb restaurant and hotels inflation, which is currently at 3% y/y. Indeed, the academic literature suggests around 50% of previous VAT cuts for the industry were passed on to lower prices. However, this won’t take effect until next July.
Second, the European Central Bank’s deposit rate is currently 2%. Given the strength of domestic demand, we think interest rates are likely to compound, not offset, strong demand. Both monetary and fiscal policy decisions mean domestically generated inflation in Ireland is likely to wax, not wane.
All told, much of the rise in the month’s inflation data was due to unfavourable base effects from airfares and fuel prices, which pushed up transport inflation. Those base effects should fully drop out at the end of the year, bringing inflation back below 2.5% y/y. Meanwhile, underlying inflation does continue to look subdued, despite the rise in headline inflation.
