Business Costs and Consumer Price Inflation in Ireland

How do consumer prices respond as costs for businesses in Ireland change? In this Letter, we seek to answer this question by examining macroeconomic data. The response of profits, wages and productivity levels to a given rise in other input costs determines the extent of cost-push pass-through to consumer prices. We find that output prices of domestically-dominated sectors of the economy, which captures the dynamics of businesses responses to higher input costs, typically do play a role in explaining consumer price inflation in Ireland. Recent cost increases for businesses are expected to contribute to inflation remaining above pre-pandemic levels for the foreseeable future given the likely capacity of labour costs and profits to adjust.