ECB will hike rates even though a fall in inflation signals the worst may be over

Annual inflation was 10.6 percent in October, or 9.4 percent based on the EU measurement. This was the first drop since June 2021.

Manufacturing costs are also falling, according to AIB, which could soon have an impact on consumers.

“Because of the freak weather, you can’t say that [inflation] has peaked, but I think there are signs that inflationary pressures in general are at least nearing a peak. How long before they fall behind remains to be seen,” said economist Austin Hughes.

There was good news for energy prices, which fell 1.9 percent in the euro-zone and rose just 0.1 percent in Ireland from October to November as wholesale oil and gas prices eased.

Electricity and gas price hikes from Irish utilities washed through October data, said Conall MacCoille, chief economist at stockbroker Davy, meaning consumers could be in for some good news.

“Oil prices have fallen, so prices at the pump could fall back at some point.

“If gas prices continue to fall or stay where they are, it remains to be seen whether energy bills could go down,” he said.

Mr Hughes said there was no sign of a “huge inflationary infection hitting the economy”.

“We are still price competitive due to current job security concerns. As bad as the cost of living pressures are, I reckon they could be worse.”

It means the European Central Bank and President Christine Lagarde don’t have to be “overly aggressive” at their December 15 rate-setting meeting, Mr Hughes said.

“They will be very aggressive. I still think it’s probably more likely they will go three quarters [of 1pc] in December, more than half.”

Davy’s Mr MacCoille said “markets are fully pricing in another half-percent hike”, bringing the ECB’s interest rate to 2.5 per cent.

Analysts expect it to reach 3 percent by the middle of next year.

But higher-than-expected inflation could prompt the ECB to act more aggressively next year, especially if high prices lead to higher wage demands.

“Individually, it makes sense to negotiate higher wages, but collectively, giving the whole economy a wage increase won’t fix the situation, as everyone will have more money for a lack of supply on different things,” Mr MacCoille said.

“Inflation has certainly peaked, but the problem is not fully resolved. Inflation will certainly come down next year but could remain well above the 2% target.”

But a peak in price hikes, if true, is unlikely to make consumers feel any better as food prices are still on the up – at least in the euro zone.

More details on Irish food prices will be available by next month.

“All in all, it will be cold comfort that there has been this easing,” Mr Hughes said.

“From an economic point of view, it’s this little ray of hope.”

The latest AIB Manufacturing Purchasing Managers’ Index shows that input costs fell to a 21-month low, while output price inflation hit a 20-month low, which is good news for producers – and ultimately consumers – is.

But sentiment is at a two-year low as new orders, including export orders, continue to fall and production slows.

“The AIB Irish Manufacturing PMI was in contraction territory in November, with the composite index falling below 50 to 48.7,” said Oliver Mangan, AIB’s chief economist.

“It brings Ireland in line with the trend seen elsewhere in recent months. On the 12-month outlook, sentiment, while still positive, has fallen to its lowest level in two years as fears of a recession mount.”