Government interventions last year to assist households with the rising cost of living appear to have added to demand, helping to push up inflation.
That's according to a new economic letter from the Central Bank, which says the effects of these fiscal interventions particularly impacted demand in the months after excise duty relief was introduced and households received rental credits.
The paper says at the start of the pandemic, both weak demand and too much supply contributed to disinflation.
But following the re-opening of the economy during 2021, a resurgence in demand combined with supply chain restrictions affecting some sectors of the economy that had been closed during the pandemic led to a surge of inflation, it claims/
"From the start of 2022 however, most of the increase in headline inflation came from the supply shock resulting from the Russian invasion of Ukraine and its impact on energy prices," the authors state.
"As global commodity prices eased thereby reducing supply side pressures, the contribution of demand-side factors to headline inflation increased during the second half of 2022.
From our estimation, this shows up in particular in increased demand for transport."
It says the Government interventions also appear to have added to demand side inflation, but more recently the decline in headline inflation since its peak in June 2022 up to May 2023 reflects an easing of price pressures predominantly from supply-side channels.
Overall, the paper finds that while both supply and demand factors are responsible for the current inflationary environment, the recent surge has come mainly from supply issues.
It says supply side factors played a significant role in the surge in inflation during last year, with the relative contribution of demand also increasing up to the point when inflation peaked in the third quarter of 2022.
It says the decline in inflation since then has been mostly driven by an easing of supply-side pressures, while the contribution of demand has remained broadly unchanged.
"In the year to May 2023 compared to the pervious 12-month period, on average around three-fifths of headline inflation relates to supply, with demand accounting for around one-third," the authors write.
"A small proportion is driven by ambiguous factors, which cannot be labelled as supply or demand with a high degree of certainty."
But the research also finds that when more volatile elements such as food and energy are stripped out, around two-thirds of inflation in the last year has come from supply factors with just under a fifth coming from demand driven-factors.
In recent months though, demand-side factors had a somewhat larger influence on services inflation, it finds.
"From a policy making perspective, the key take-away is that for inflation to fall further, it will require an easing of both supply and demand pressures, with the latter increasingly important for services in recent months," it concludes.
