Bernard Durkan (Kildare North, Fine Gael)
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285. To ask the Minister for Finance the extent to which his Department continues to evaluate the causes of inflation in this jurisdiction; and if he will make a statement on the matter. [10040/22]

Paschal Donohoe (Dublin Central, Fine Gael)
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Consumer price inflation picked up sharply over the second half of last year and by December was running at a multi-decade high of 5.7 per cent. While the annual rate of inflation moderated to 5 per cent in January, this reflects seasonal patterns, including post-Christmas sales rather than an easing of inflation more generally. Almost every advanced country in the world is in the same position, with the inflation rate reaching a record high of 5.1 per cent in the euro area in January.

Both domestic and external factors can explain this uptick in inflation. On the external front, the rise in wholesale energy prices is the key contributor and reflects the rapid rebound in global demand. Global supply chain disruptions including the availability of inputs, including timber and semi-conductors, and transport bottlenecks have also added to inflationary pressures.

Domestically, the speed and strength of the economic recovery has led to a mismatch between demand and supply and put upward pressure on prices. Brexit and the reversal of the temporary VAT cut since September are likely to have been additional factors, with regulations affecting the minimum price of alcohol contributing to inflation in January.

At the time of Budget 2022, my Department forecast headline inflation of 2¼ per cent for this year. Due to energy price spikes since the Budget, there will be some upside to this projection, with inflation of around 4 per cent or more based on current energy price projections now more likely. Nevertheless, inflation is expected to ease over the course of this year as some of the temporary drivers fade, demand stabilises and supply catches up. Updated projections will be published with the Stability Programme Update in April.

However, the possibility that these price dynamics prove more persistent cannot be ruled out, with the likelihood of second round effects increasing the longer this period of high inflation lasts. The higher inflation environment has brought about an earlier than expected shift in monetary policy. In the euro area, market participants are now pricing in two interest rate increases this year; these come on top of the ending of the Pandemic Emergency Purchase Programme next month. The net effect of this monetary policy shift is expected to be higher sovereign borrowing costs. In light of these risks, my Department will continue to closely monitor inflation over the coming months.