Ibec predicts inflation to fall under 4% this year as energy prices stabilise

Ibec is now forecasting inflation to fall below 4 per cent this year, significantly lower than previously anticipated, as lower energy prices internationally ease the pressure on households.

In its latest quarterly outlook, the employers’ group also upgraded its forecasts for both consumer spending and overall domestic demand, noting the Irish economy was performing better than expected.

“While significant uncertainties remain, recent reductions in the volatility of wholesale energy prices, an easing of inflationary momentum and resilient global demand mean that we should be more confident about 2023 than we might have expected to be late last year,” it said.

Risks to economy

The organisation said it now expects inflation to begin to normalise in the second half of the year and into 2024, falling below 4 per cent by the end of 2023 and to 2.8 per cent next year. However, it cautioned the reduced level of price growth was contingent on stabilising energy prices and that rising interest rates still posed risks to the economy.

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“Whilst the period of rapid inflation is behind us, inflation will remain above the record lows of the past decade and the ECB target of 2 per cent,” it said.

“The driver of this above trend inflation, in the short-term, is that the level shift in prices experienced in the past 12 months will take time to work through supply chains, the labour market and other margins of adjustment,” it said.

[ The Irish Times view on forecasts of falling inflation ]

Ibec’s optimistic forecast on inflation comes against worrying economic data coming out of the US, which 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 on Friday and appeared to rule out the prospect of interest rate cuts this year.

In its latest assessment, Ibec said stronger-than-expected consumer spending and domestic demand in the Irish economy would deliver growth — in gross domestic product (GDP) terms — of 5.2 per cent this year and 5.8 per cent next year, significantly above the euro zone average.

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Despite rising energy costs squeezing households and a significant dip in consumer sentiment in the second half of last year, household spending and retail sales over the Christmas period have proven relatively robust, it said.

On housing, the group said while delivery from the private sector has been increasing there is room for local authorities and approved housing bodies to play a greater role.

Housing stock

Given current demand and the high proportion of social housing stock that is old and requires refurbishment, it’s likely that upwards of 20,000 additional social, affordable and cost-rental units per year over the timeline of the Government’s Housing for All plan will be needed, rather than the 16,000 units targeted.

On the overall outlook, Ibec chief economist Ger Brady said Europe was facing significantly reduced exposure to fluctuations in energy prices for 2023, due to higher-than-expected storage levels and reduced demand over winter.

“This, in turn, makes a prolonged recession in Europe unlikely. All of this together, means we have upgraded our forecasts for both consumer spending and overall domestic demand in the Irish economy. We now expect the domestic economy to grow by 3.6 per cent in 2023 and inflation to fall to under 4 per cent before the end of the year,” he said.