Economics commentary - The economic crisis caused deflation in 2009, but consumer price levels rose again in late 2010. This essay aims to investigate the reasons behind Irelands persistent inflation.

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Diagram 1: HICP and CPI of Ireland

Ireland is a small and open economy, who is consistently ranked in the top 10 as one of the wealthiest countries in the EU for the past decade. Despite huge growth in the 1990s,  inflation rate has remained at below 5% for almost fifteen years, but in late 1999, inflation suddenly surged and remained persistently at the top of the EMU inflation league.  According to the EU Harmonised Index of Consumer Prices (HICP), prices in Ireland increased by 14.2% compared with an EU-15 increase of 6.6% between December 1999 and December 2002. Inflation increased again in 2006-2007. The economic crisis caused deflation in 2009, but consumer price levels rose again in late 2010. This essay aims to investigate the reasons behind Ireland’s persistent inflation.

EXTERNAL FACTORS

In 2007, the sum of imports and exports were equivalent of 148% of GDP, meaning that Ireland’s economy is heavily affected by in the international market. 

A) RISING PRICES OF ENERGY

Oil prices have fluctuated greatly since the 1990s.  Even though the strength of the Euro have dampened some of the events, as prices of oil are reported in US dollar, and conversion rates may reduce some of the impact,  there is still a considerable increase in price. 

The Irish economy is heavily dependent on imported oil, 98.3% in 2008, which is much higher than the euro area average of 69.0% (shown in Diagram ) 

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Oil products are currently the most important component of energy in the Irish economy, representing 64.8% of final energy consumption, compared with the Euro zone average of 43.9%. Gas prices were also a major factor.

Energy price increases directly contributed about one quarter of the 11.3 per cent cumulative increase in the Irish HICP price level between 2004 and 2008. The weight of the energy component in the HICP is approximately 8.7% for Ireland, which is slightly higher than 7.8% in the CPI. The petrol and diesel component accounts for close to a half of the energy component of ...

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