Executive Summary

It can be easy for investors to feel overwhelmed by the relentless stream of news about markets. Being bombarded with data and headlines presented as affecting your financial wellbeing can evoke strong emotional responses from even the most experienced investors.

We should remember that markets can be volatile and recognise that, in the moment, doing nothing may feel paralysing.

When faced with short-term noise, it is easy to lose sight of the potential long-term benefits of staying invested. While no one has a crystal ball, adopting a long-term perspective can help change how investor’s view market volatility and help them look beyond the headlines.

Inflation has not been a serious or persistent economic problem in developed markets for decades but naturally as investors have seen their portfolios decline this year, many are beginning to question if they need to do anything different.

In this guide to inflation we examine the history, the cause of the recent climb, and how we should react.

Introduction

Annual inflation in Ireland jumped to 7.8% in May of 2022, the highest since September of 1984 and accelerating from a 7% rise in the previous month.

The main contributers to higher inflation were housing and utilities (20.9% vs 17.1% in April) and transportation (16.5% vs 18.9% in April), as surging oil prices lifted costs for home heating and vehicle fuels.

The Consumer Price Index (CPI) also accelerated for restaurant and hotels (5.9% vs 5.1% in April), and food and non-alcoholic beverages (4.4% vs 3.5%). On a monthly basis, consumer prices were up by 0.9%, rising by the same magnitude from the previous month.

Source: Central Statistics Office Ireland

Putting this into longer term historical context, inflation is currently elevated relative to the average inflation rate since the mid-1980s.

Further context can be provided by looking at the European Cenral Bank base rate since the birth of the Euro. We can see that there is currently a substantial mismatch between the current rate of inflation and the current ECB base rate.

We can see that previously when inflation has been around 5% the ECB base rate has been over 4%.

The ECB flagged a 25-basis point interest rate hike in July 2022 and said a bigger increase may be needed in September 2022 as inflationary pressures were increasing and broadening, raising the risk that high price growth will become entrenched.

The ECB now sees inflation at 6.8% this year, more than three times its target, and price growth could hold above 2% through 2024.