Irish consumer prices for March rose 3% in year-on-year terms

The risk of inflation taking hold in Ireland is a concern for all. This risk is now materialising with headline rates of inflation accelerating and likely to increase further in the months ahead. The decision by Irish households to hold large swathes of cash on deposit will prove increasingly costly if inflation continues to track higher.

The latest inflation numbers

Consumer Prices in March, as measured by the CPI, increased by 0.9% in the month, which is the second consecutive monthly increase of 0.9%. This compares to an increase of 0.1% recorded in March of last year. Prices on average, as measured by the CPI, were 3.0% higher in March compared with March 2010.

The annual rate of inflation in Ireland for the last 10 years can be seen in Chart 1. The most striking feature is that inflation has risen from a low of -6.6% to currently stand at 3% in little over a year. The most notable changes in the year were increases in:

Housing, Water, Electricity, Gas & Other Fuels   +12.5%
Miscellaneous Goods & Services                        +7.6%
Communications                                                 +4.1%
Health                                                                 +4.1%

Obviously, the impact of rising energy prices is having a very big impact on the level of consumer prices and it can be expected (hoped?) that this rate of price increase will not be sustained. However, inflationary pressures are becoming more widespread and are evident in many other components of the index as can be seen from the following Chart 2.

Chart 1: From a low of -6.6% to 3% and rising - inflation is back!

Chart 2: It’s not just energy prices and mortgage costs

Inflation erodes the purchasing power of cash

Cash is a low risk option in the short-term but it becomes an increasingly risky option as time goes by. The ravages of inflation can destroy the purchasing power of money and the only meaningful way to protect against rising inflation is by having exposure to real financial assets, such as equities, property and commodities amongst others.

With inflationary pressures also mounting on a global basis, the outlook is for rising consumer prices for the year ahead. In our view, the most appropriate asset allocation for a medium to long-term investor who wants to beat inflation is a multi-asset investment strategy rather than a concentrated allocation to one management style or asset class, especially if that asset class is cash or deposits.

Important - Disclaimer: This document is intended as a general review of investment market conditions. It does not constitute investment advice and has not been prepared based on the financial needs or objectives of any particular person, and does not take account of the specific needs or circumstances of any person. Any comments on specific investments are intended as an objective, independent view in relation to that investment generally, and not in relation to its suitability to any specific person.