McGrath says inflation will fall more rapidly than expected

Inflation in the Irish economy will fall “much more rapidly than previously assumed”, averaging 4-5 per cent this year, thanks to falling energy prices, Minister for Finance Michael McGrath has said. The Department of Finance had previously anticipated a rate of 7 per cent for this year.

“The good news is that inflation has now peaked and is falling back,” Mr McGrath told the Irish Tax Institute’s annual dinner at the Clayton Hotel in Dublin, noting his department had recently revised down its forecasts

“At the time of the budget,we anticipated that the annual rate of inflation for this year would average around 7 per cent, with the annual rate falling to 4 per cent in the final quarter of the year,” he said. “These were based on the assumption of oil and natural gas prices at the time of the budget. Thankfully wholesale prices have fallen sharply since then and – provided there is no further energy price shock – inflation is set to fall much more rapidly than previously assumed, and we now believe it will average between 4 and 5 per cent across the year.”

His predictions, however, come as worrying economic data coming out of the US show the personal consumption expenditures price index, the Federal Reserve’s preferred gauge of inflation, shot up 0.6 per cent last month after gaining 0.2 per cent in December. The news sent markets into reverse and appeared to rule out the prospect of interest rate cuts this year.

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In his address Mr McGrath also warned on “the vulnerabilities” associated with Ireland’s corporation tax. He said his department had estimated that up to €10.5 billion of last year’s record €22 billion haul was likely to be “windfall in nature”, meaning it cannot be relied on into the future.

“Coupled with this risk my department also estimates that an ageing population means that expenditure to 2030 will have to be €7 to €8 billion higher just to stand still,” Mr McGrath said. “Together these two budgetary developments represent very significant risks to the exchequer, ones which I cannot ignore,” he said, noting this would place greater emphasis on the National Reserve Fund.

The Minister said his officials were looking at options around “the establishment of a more future-focused investment fund that would cater for changes in demographics in the years ahead, as well as protecting against fiscal shocks such as a sudden loss in corporate tax revenue”.

On global tax reform and the introduction of the new minimum rate for businesses of a certain size, Mr McGrath said he would bring forward legislation to deliver these new rules in the Finance Bill later in the year. “We know that the implementation of this agreement will ultimately come at a cost to Ireland in terms of reduced tax receipts, but I remain of the view that this is a price worth paying to bring certainty and stability to the global trading environment.”