More than a percentage point now separates Ireland’s consumer price index (CPI), which showed inflation at 5.8pc in July, from Eurostat’s harmonised index of consumer prices (HICP) for Ireland, which came in at 4.6pc.
The difference between the two is that the CPI, compiled by the Central Statistics Office, includes mortgage interest payments, while Eurostat does not.
And as interest rates rise, the gap between EU and Irish inflation measures is widening.
Is it just a case of “lies, damned lies and statistics”?
“These things are kind of atlases of where things are, so they don’t tell you everyone’s cost of living exactly,” said economist Austin Hughes.
“The argument, in terms of the HICP, is that housing is an investment, so it’s not a pure consumption good. People have an asset, at the end of the day.
“Both measures have their strengths and weaknesses, but if you’re a mortgage holder – depending on if you’re on a tracker or on variable rate – there is no question that your cost of living has been very significantly affected by higher interest rates.
“For that reason, it’s probably the case that Irish people feel that the domestic one probably more closely represents the cost of living here.”
The Irish CPI has no bearing on the European Central Bank (ECB) interest-rate decisions. Ireland’s HICP numbers have some, but little influence, given the small size of the economy compared to eurozone heavyweights like France or Germany.
European Central Bank chief economist Philip Lane. Photo: Getty Images
The ECB will continue to raise rates as long as average eurozone inflation – which was running at 5.3pc in July – remains above its 2pc target.
But the fact that the gap is widening between the two inflation measures is another signal of the high cost of housing here.
Irish inflation rose sooner and more speedily than in the rest of Europe. And it has come down more slowly than some of our nearest neighbours.
Belgium, Luxembourg and Spain – which had some of the eurozone’s highest inflation rates over the last year – saw price hikes of around 2pc in July, the ECB’s target.
Inflation here also took off well before the ECB began to raise rates last summer, rising above 5pc in late 2021 and peaking at 9.6pc in July 2022. Housing and energy (which are lumped together in the CPI basket) were the driving forces behind those price increases.
Last month’s Credit Union consumer sentiment index saw mortgage and rent costs coming in second after energy when it comes to people’s views about the drivers of inflation, ahead of food.
That is an indication that people see the ECB’s policies as worsening their standard of living.
Philip Lane, ECB chief economist and former governor of the Central Bank of Ireland, said yesterday that firms and households across the eurozone have enough of a buffer – thanks to high savings – to withstand the ECB’s rate hikes.
“I think many people are in ok shape,” he told the ECB podcast. “So they will respond to high interest rates by reducing demand, but we don’t think it will lead to this kind of vortex that leads to a deep recession.”
