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Inflation will average 4.5% in 2022 – Central Bank

Rural, low-income, and older households are experiencing larger cost of living increases from higher inflation, according to the Central Bank.

An economic letter from the Central Bank, by Reamonn Lydon, presents data on how inflation levels differ across household types, according to factors including location, income, and age.

Current Central Bank inflation projections indicate that inflation will average 4.5% in 2022, with levels forecast to decline to 2.4% in 2023.

However, households that drive more or spend a higher proportion of their income on home heating will be particularly affected by recent increases in energy prices, which previous Central Bank research has shown to be a key factor in the current high levels of aggregate inflation.

Relative to higher-income households, lower-income households spend a greater share of their income on energy and food, and less on goods and services.

Headline inflation was 5.7% for the average household in December 2021, but is higher for rural (6.2%), lower-income (6.1%), owner-occupier and older households (both 6%).

Main driver

Increases in energy prices are the main driver of differences between these household types. Of the 6.2% inflation level experienced by rural households, half of this is attributable to energy costs (specifically, home energy costs and personal transport).

This compares with a total 5.4% inflation rate for urban households, of which 2.1% is attributable to energy costs.

Goods and food inflation tends to be broadly similar across household types. The lower impact of energy price increases for some households is partially offset by higher increases in services prices for those same households.

The lowest estimated inflation rate in December 2021 is for non- or low-driving households, at 4.7%.

Social transfers  

The Central Bank letter suggests that governments can look to address cost-of-living increases by linking supports to existing social transfers.

While energy price rises are expected to ease in 2022, energy price levels are likely to remain elevated in the medium term, the Central Bank has said.

Policies that help to increase energy efficiency for households, together with increased investment in non-fossil fuels, should therefore be a medium-term priority, the regulator believes.