Inflation to go above 10%, Central Bank warns

Regulator says elevated level of price growth will depress real incomes by about 3.3%

Ireland’s cost-of-living squeeze looks set to intensify in the coming months, with the Central Bank forecasting inflation will rise above 10 per cent, a level not seen since the early 1980s.

This elevated level of price growth will depress real incomes by about 3.3 per cent this year, representing the biggest drop in living standards in more than a decade, the regulator warned in its latest quarterly economic bulletin.

Poorer households will face an even bigger hit as they spend a greater proportion of disposable income on energy and food and are less likely to have built up savings during the pandemic.

Despite the price squeeze, the Central Bank still expects the Irish economy to grow strongly this year, by more than 9 per cent in gross domestic product (GDP) terms, on the back of buoyant exports from the multinational sector.

The outlook for modified domestic demand, a better indicator of domestic activity, has been revised down to 4.3 per cent in 2022, 4.2 per cent in 2023 and 3.8 per cent in 2024.

“While positive economic growth is still expected in 2022, higher prices and costs are already impacting negatively on households and firms,” it added, “recovery from the pandemic has been tempered by the effects of the Russian invasion of Ukraine and persistent supply chain challenges.”

The Central Bank said it expected consumer price inflation to average 7.8 per cent this year, an increase on its previous projection, due to further energy price hikes along with “more generalised price pressures” across a range of goods and services.

It predicted inflation would peak at just over 10 per cent in the third quarter before falling back.

“Current financial market expectations are for energy prices to decline in the second half of the year but to remain above pre-pandemic levels over the course of the forecast horizon,” it said.

Conditional on these assumptions, inflation is forecast to moderate to 4.2 per cent in 2023 and 2.1 per cent in 2024.

However, the Central Bank cautioned these inflation forecasts were subject to a high degree of uncertainty, with the possibility of future commodity price hikes and restricted energy supply muddying the outlook.

In its report, the regulator predicted wages would rise by 6.6 per cent this year, a significant increase on its previous projection, as the labour market tightens and employment in high-wage sectors such as ICT grows.

However, it played down the prospect that a wage-price spiral was developing in the Irish economy.

There is concern that demands for higher wages to compensate for higher living costs will embed inflation in the economy.

The Central Bank said supply constraints were driving up input costs and causing greater challenges to the necessary delivery of housing and other key infrastructure.

It forecast that housing output would reach 31,000 in 2024, with total units delivered over 2022-2024 coming in about 5,000 units lower than previously expected.

Eoin Burke-Kennedy

Eoin Burke-Kennedy

Eoin Burke-Kennedy is Economics Correspondent of The Irish Times