Saturday, April 10, 2010

Core Inflation continues to fall

In line with what we saw back in January the rate of “core” inflation in Ireland continues to fall.  The measure of core inflation used here is the overall CPI rate less the effect of energy products and mortgage interest, both are which are largely externally driven.  Though we are now seeing increases in mortgage rates which are driven by domestic circumstances rather than ECB rate changes.
Anyway looking at the overall and core inflation rates.
Core Inflation
We can now see that the two rates have almost fully converged but they are going in opposite directions.  The rate of core deflation increased from -2.5% in February to -2.8% in March.  In contrast the overall deflation rate eased slightly from -3.2% to -3.1%.
The main reason for this convergence is the unwinding of the swift cuts in ECB interest rates from 4.25% to 1.00% that occurred between October 2008 and May 2009.  The effect of most of these cuts has now been removed from the inflation rate as they occurred more than 12 months ago.  We can expect the mortgage interest inflation rate to turn positive in the next few months, but it is still too early to suggest that the current period of deflation is over.

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