Inflation to fall in line with oil prices

Recent falls in the price of crude oil should translate into sharp declines in inflation rates across the major economies in September and October, according to the September Bank of Ireland Global Markets Economic Research Bulletin published today (Thursday 28 September, 2006).

Ireland should see the benefits in the September and October CPI figures, though higher mortgage costs stemming from the ECB's August rate rise will dampen the impact slightly. Nevertheless, the annual inflation rate may still decline to 4.2% from 4.5% in August, which would reduce the chance of inflation hitting 5% later in the year as further interest rate increases kick in.

Commenting on the global movements, Dr Dan McLaughlin, Chief Economist, Bank of Ireland Group said: Brent crude, the main European benchmark is now trading at $60 a barrel which, from a high of over $78 in early August, is a 25% fall. Indeed, Brent is now below its level a year ago, as is the main US Benchmark, which has also fallen by a similar percentage from its mid-summer highs. Refined products too have fallen sharply and this has fed through into the retail chain - the average price of gasoline in the US is now under $2.40 a gallon from over $3 a few months ago, and Europe has also seen declines at the pumps. Consequently September may well see these falls in transport costs reflected in the various CPI indices, with October also likely to benefit given the time lags involved between the wholesale and retail levels.

Continuing, he said: The impact on annual inflation rates will be greater still however, because September 2005 saw a sharp rise in energy prices following hurricane Katrina - consumer prices overall rose by 1.2% in the US, following a 12% rise in energy prices. In the euro area the rise in consumer prices was 0.5%, and in Ireland the monthly increase in the CPI was 0.8%, with energy costs increasing by 7%.

This Katrina impact has affected the annual inflation rate for the past twelve months but the upcoming September inflation readings will no longer reflect this oil-related rise in prices. In addition the annual inflation rate will now receive an additional downward impetus from monthly falls in transport costs. In the US this may result in a plunge in the annual inflation rate to 2.5% or below, from 3.8% in August, with inflation in the euro area falling below the ECB's 2% inflation target for the first time since January 2005.

Ends
Thursday 28 September, 2006

For reference:
Dr Dan McLaughlin
Chief Economist
Bank of Ireland
Tel: 01 609 3326

Damien Daly
Head of Marketing
Bank of Ireland Global Markets
Tel: 01 609 3303

Anne Mathews
Media Relations Manager
Corporate Communications
Bank of Ireland
Tel: 01 604 3833

Profile of Bank of Ireland Global Markets

Bank of Ireland Global Markets is the number one treasury services provider in Ireland. Global Markets' key offering is a comprehensive range of treasury and international banking services to Irish and international companies from its global headquarters in Dublin. Customers are provided with a single point of contact to handle all their treasury management needs from currency, interest rate and international trade risk management to treasury investment solutions and global payments. It has built up considerable expertise in risk management and has a reputation for innovation and price competitiveness in the marketplace. Bank of Ireland Global Markets' No. 1 position is recognised through award winning, including the iMoneyNet Offshore Money Fund Report (OMFR) Award for its US Dollar liquidity fund, the Irish Association of Corporate Treasurers (IACT), Euromoney and The Banker publications.