Irish inflation will ease to average of 5% this year, Central Bank expects

While inflationary pressures are easing, the Irish economy will grow at a much reduced rate this year and next as elevated prices and higher interest rates curb activity, the Central Bank has warned.

In its latest quarterly bulletin, the financial regulator said it expected inflation to fall more rapidly than previously expected, averaging 5 per cent this year instead of 6.2 per cent (its previous forecast) on the back of falling energy prices.

Despite the improved outlook for inflation, high prices and rising interest rates are still expected to “temper the pace of growth” with modified domestic demand (MDD), the preferred measure of economic growth used here, expected to expand by 3.1 per cent this year and by 2.9 per cent next year, down from 8.2 per cent in 2022.

“The ongoing energy crisis and associated high inflation, elevated uncertainty, as well as the tightening stance of monetary policy will continue to generate economic headwinds,” the Central Bank said.

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“There remains a significant amount of uncertainty around the precise path for inflation, and the extent to which underlying inflation measures such as core inflation will remain elevated,” it said, while noting the effect of the energy price shock would still be seen in the price of other goods and services for some time to come.

Nonetheless, the Central Bank said the outlook for real household disposable income, which underpins consumer spending, had improved given the lower than previously forecast path for inflation and the continuing strength expected in the labour market.

“The global economic backdrop has performed better than previously expected, and the Irish economy is showing continuing resilience,” the Central Bank’s director of economics and statistics Robert Kelly said.

“As the year progresses, amid a tight labour market, household real incomes are expected to recover gradually, supporting underlying growth in the domestic economy,” he said.

The Central Bank’s latest inflation forecasts come on the back of a surprise jump in the headline rate here – it rose from 7.5 per cent to 8 per cent in February – stoking further concern that it may be stickier than initially anticipated.

Economists are also concerned about the second-round impacts of inflation particularly on wages with workers typically demanding better compensation when the cost of living goes up.

While hourly earnings increased by 5.3 per cent in the final quarter of last year, up from 3.7 per cent in the previous quarter, this was attributed to the lump-sum payment of salary arrears contained in the latest public-sector pay agreement, the Central Bank said, noting there was no evidence as yet of a wage-price spiral developing in the Irish economy.

While higher interest rates were driving house prices down in many property markets abroad, Mr Kelly said supply shortages here were likely to keep upward pressure on prices and outweigh the dampening impact of higher borrowing costs.

The shortfall in supply stretches back over multiple years and “we’re at the point now where it [housing] is a constraint on economic activity”, he said.

In its report, the Central Bank forecast that new home completions would be constrained by labour and material shortages, as well as continued increases in construction input costs. House completions are forecast to be 27,000 this year, increasing to 29,500 and 32,500 in 2024 and 2025.

The bank noted there was a stronger-than-anticipated out-turn, with completions for the year totalling almost 29,000. “Forward-looking indicators would suggest, however, that completions this year will be lower,” it said.