European Commission now expects Irish inflation to rise by 4.6% this year

The Irish economy is expected to grow by 5.5 per cent this year, with inflation rising by 4.6 per cent, well above the euro zone average, according to the European Commission.

The Brussels-based institution said it expects euro-area inflation to spike at 3.5 per cent this year, higher than previously expected, before falling to 1.7 per cent in 2023.

Consumer price growth for the single-currency area is estimated to have amounted to 2.6 per cent for last year.

The outlook will add to the debate over when the European Central Bank may raise interest rates after its president, Christine Lagarde, refused last week to rule out a potential increase in official borrowing costs this year, and said there was “unanimous concern” about inflation on the ECB governing council.

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The Central Bank of Ireland’s governor, Gabriel Makhlouf, reiterated in a blog published on the organisation’s website on Thursday that “risks to inflation – from many sources – are to the upside in the near term”.

The ECB has a 2 per cent inflation target.

While Mr Makhlouf, a member of the ECB governing council, noted that if the current trends of overall inflation persist, “the case for monetary policy action becomes stronger”, he warned that monetary policy moves are not very effective at dealing with the fact that prices are being driven by international supply shortages rather than soaring demand for products.

“Strong increases in energy prices mean that the leading driver of current inflation has been from the supply side, but monetary policy’s primary effect is through the demand side of the economy,” he said, adding that he said in November that “constraining demand to bring it back into line with what might be a temporary supply interruption could depress incentives for supply to return and therefore be counter-productive”.

While Mr Makhlouf acknowledged that the inflation outlook will be a “key concern” for the members of the governing council in the coming months, he said they need to be forward-looking in their analysis.

“It will be important to remain data-driven in our assessment of the evolving inflation outlook, and ready to take policy actions to ensure that inflation stabilises at our 2 per cent target over the medium term,” he said.

Consumer prices

Meanwhile, the European Commission expects continued Irish economic growth in 2023 with gross domestic product (GDP) expected to be 4.5 per higher. Irish consumer prices will also continue to rise next year, up 2.5 per cent.

The commission’s Irish inflation forecast for this year is 1.5 percentage points higher than what it had estimated in November, while its 2022 figure has moved up 1 point.

The commission said Covid restrictions in place in the early weeks of the year likely dampened growth in the first quarter. However, a “rapidly recovering labour market, a gradual reduction of large household savings through consumption and a relatively benign financial situation in the corporate sector” would lead to further growth.

Annual GDP growth for 2021 is estimated at 13.7 per cent, slightly lower than a previous forecast due largely to the impact of the Omicron variant on activity.

"Ireland's economic outlook remains subject to uncertainty surrounding trade developments related to the implementation of the protocol on Ireland/Northern Ireland, upcoming changes in international taxation, and rising inflation. The performance of multinational corporations could swing growth in either direction," the commission said.