Major cost-of-living shock expected in months with inflation forecast to hit 8.5%

Inflation in the Irish economy is expected to surge to 8.5 per cent or even higher in the coming months, a level not seen since the early 1980s, as the war in Ukraine compounds existing price pressures in the global economy.

In its latest quarterly bulletin, the Economic and Social Research Institute (ESRI) warns that the cost-of-living squeeze will see incomes – in real terms – fall by an average of 2 per cent this year. That means a typical household will see its income decline by about €1,300 once the effects of inflation are accounted for.

The ESRI said Russia’s invasion of Ukraine was having negative impacts on global economic activity and further exacerbating inflationary pressures, primarily through higher energy and commodity prices. It said Irish consumers could be facing into a period of energy rationing if the crisis worsens.

"There is a considerable risk that, should tensions increase, further disruptions to gas and oil supplies might occur, and in a worst case, end-user rationing might be required in Europe, " it said.

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A Government memo circulated to Ministers earlier this month similarly warned that household gas and electricity may have to be rationed if the current energy crisis sparked by the war worsens.

The economic fallout from the conflict, the ESRI said, would result in lower-than-expected growth in the Irish economy of 6.2 per cent this year and 4.3 per cent next year. The think-tank had been forecasting growth of 13.6 per cent this year and 7 per cent in 2023 as recently as Christmas.

“While the outlook for the Irish economy is still positive in 2022 and 2023, the impact of the Russian invasion of the Ukraine will lower the expected growth rate of the Irish economy and lead to higher rates of domestic inflation,” the ESRI’s Kieran McQuinn said.

Headline inflation

He said he expected headline inflation to peak at 8.5 per cent or possibly higher in June or July of this year – the last time it was higher than 8.5 per cent was in 1984 – and to average 6.7 per cent for the year as a whole.

Mr McQuinn also warned that measures aimed at insulating households from higher levels of inflation could compound the cost-of-living squeeze if they are not targeted. The Government has already announced a €200 energy credit and cuts to excise duty on fuel.

The cost of supporting and housing refugees fleeing the war in Ukraine is expected to be considerable and officials in national and local government are scrambling to find accommodation in anticipation of a further 10,000 people arriving before the end of this month.

Tánaiste Leo Varadkar told the Dáil yesterday that the number of Ukrainians arriving in Ireland could double again to 40,000 next month.

Minister for Agriculture Charlie McConalogue said that the numbers could eventually reach 200,000, though Minister and senior officials said a total of less than 100,000 was considered a more realistic estimate.

Public finances

In its bulletin, the ESRI warned that higher levels of inflation also posed “significant downside risks” for the public finances. As things stand, the Government is expected to benefit from continued growth in the Irish economy and to run a modest budget surplus this year, the first since 2019.

“The Irish economy entered 2022 showing all the signs of a robust recovery from the pandemic. However, the fast changing global economic and geopolitical context points towards a worsening economic outlook with numerous headwinds,” the ESRI’s Conor O’Toole said.