Supply and Demand Determinants of Inflation in Ireland

Darragh McLaughlin and Thomas Conefrey
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Darragh McLaughlin: Central Bank of Ireland
Thomas Conefrey: Central Bank of Ireland

No 4/EL/23, Economic Letters from Central Bank of Ireland

Abstract: To what extent can the basics of supply and demand help to explain the high rates of inflation in Ireland since 2021?In this Letter, we analyse the data using a simple model-based approach and find that, on average, supply-side drivers explain around three fifths of inflation in the year to May 2023, while demandside factors account for over one third of inflation. The decline in headline inflation since Q3 2022 has been mostly driven by an easing of supply-side inflationary pressures. The contribution of demand to core inflation appears to have faded over the last 12 months. Nevertheless, demand has become a more important driver of services inflation recently – consistent with signs of stronger domestic inflationary pressures.

Date: 2023-09
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