What is driving inflation? – Record inflation rates explained

Many eurozone countries are experiencing record levels of inflation fuelled by global supply chain issues and Russia’s invasion of Ukraine.

Record inflation rates explained Ireland's inflation rate reached 7.8% in May, the highest level in 38 years. Such high rates of inflation aren’t limited to Ireland. Many eurozone countries are experiencing record levels of inflation fuelled by global supply chain issues and Russia’s invasion of Ukraine.

Some analysts are predicting that inflation will rise as high as 10% as price pressures continue to be felt. The high rates of inflation are leaving many consumers struggling due to a cost of living crisis.

What is inflation?

Inflation is the fall in the value of money due to price increases. Higher prices in one sector do not necessarily hurt the economy. However, when prices rise across a wide range of goods consumers are unable to buy as many goods for the same price.

Why is inflation so high?

Various factors can cause an increase in the level of prices. Currently, much of the inflation seen today is being attributed to global supply chain issues, as well as the impact of Russia’s invasion of Ukraine.

As countries across Europe gradually phase out their supply of Russian gas, the price of oil has rapidly increased, surpassing $120 (€112) per barrel. The Opec+ alliance agreed to accelerate oil production increases slightly last week, however, there has still been a continued increase in prices. Analysts are warning that oil could trade at an average of $140 (€131) per barrel later this year.

Such high prices for oil have caused energy prices to increase sharply with annual inflation for electricity and gas reaching 40.9% and 57.1% respectively.

Rising energy prices have resulted in higher production costs for companies which then pass the price increase onto consumers. This leads to high levels of inflation across sectors including household bills, food and retail.

The rapid increase in prices has meant that many people are facing a cost of living crisis as they struggle to afford essentials.

What is being done to tackle inflation?

The ECB has a mandate to keep inflation around the 2% level. However, with sky-rocketing inflation rates, there has been an ongoing debate within the ECB regarding what measures they can take to slow down rising prices.

The European Central Bank (ECB) said on Thursday that it would carry out a 0.25% interest rate increase in July. This will be followed by another hike in September which will be at least 0.25%.

The increase in interest rates causes higher borrowing costs, this should mean that people will gradually begin to cut down on spending. It is hoped that this will lead to a decrease in the demand for goods and services, which should then cause inflation to fall.

However, the higher rates can also dampen growth. Therefore the ECB’s job is to foster an economic environment that balances snuffing out inflation and blunting economic activity.

It is expected to take some time before the impact of the interest rate increases is felt by consumers. Therefore, it is likely that high inflation rates are set to be a feature of the Irish economy in the months ahead.