Updated / Thursday, 18 Jun 2026 11:19
If the severe scenario of 5% inflation happens next year, wages would fall in real terms
The Central Bank has revised upwards its forecasts for inflation for this year and next, and warned of the possibility of it reaching almost 5% in a severe scenario in 2027.
The bank said higher energy costs are eroding household incomes and damping consumer confidence, while also feeding through to broader cost of living pressures and eating into pay increases. When inflation is taken into account, wages will only rise by 0.5% this year.
If the severe scenario of 5% inflation happens next year, wages would fall in real terms.
The bank said its baseline forecast for inflation is that it would average 3.5% this year and 2.9% in 2027.
Central Bank Director of Statistics Robert Kelly said: "With the disruption in the Strait of Hormuz continuing into its fourth month, despite news of a resolution, uncertainty remains".
"Even when the conflict is fully resolved, the restoration of supply chains will take an extended period," he cautioned.
The Central Bank said the domestic economy will continue to expand at a modest rate with growth of 3.3% this year and 2.8% in 2027.
The bank has also joined the Irish Fiscal Advisory Council in warning about the effect of consistent Government spending overruns on the public finances.
It said the additional expenditure would mean the underlying deficit, when windfall corporation tax paid by multinationals is excluded, would deteriorate by €25.7 billion by 2030.
This would erode fiscal buffers and limit the Government’s capacity to respond to future negative shocks, it cautioned.
It said while expenditure has increased significantly, it had become more dependent on uncertain tax revenue from multinationals.
It said expenditure growth had exceeded Budget figures in the last five years, and overall spending was well above sustainable capacity.
The bank said that growth in employment is moderating with job advertisements falling, expectations about wages declining and unemployment edging upwards.
But it has still forecast growth in employment this year and next.
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Speaking on Morning Ireland, Robert Kelly said that vulnerable households will need protection in terms of public supports.
Mr Kelly said that possibly diesel and petrol price changes will be immediate, some price pressures have already gone into the economy, and it will take time to absorb those shocks.
He said that there has been supply chain disruption, not in a major way, but it can be seen in certain elements, like aluminum coming out in the Middle East.
"With all of these things, and the longer it goes on, the more and more impactful that will become," he stated.
"We will absorb it, but, of course, it's better than an escalated period where this goes on for a long period, where it gets worse and worse. But really, the timing is important here," he said.
The central banker said that wages will be broadly breaking even, maybe even a slight increase for the average household of about 0.5%, but in severe cases where inflation is rising towards 5% next year, households will have decreased spending power.
"Any wage increase they're getting at the moment has been cancelled out by inflation, and if things get worse, you're going to be going backwards, and this is before we even take into account we're talking about an increase in wages," he said.
He said the issue for the Government is balancing tthe fiscal envelope.
"They have a big capital programme, so it really is about thinking about we looked at a range of potential outcomes in terms of scenarios, calibrating in a targeted way, tailored and temporary, that the right households are getting the support, but not broad-based, that we have to increase the fiscal envelope," he explained.
"Right now the spending pot is growing faster than the economy outside of corporation taxes," he said.
"The Irish economy in 2022 was roughly spending about 20% of those. By 2029 looking at the projections, it's 90% of those," he said.
He said that Ireland is spending and becoming more dependent on corporation tax but that could have sudden changes.
"If you allow dependencies grow on these taxes, there's an underlying risk that they could suddenly stop," he warned.
He said it was about finding sustainability and reliance in public finances, and finding the right balance, he concluded.
Read the full article at RTÉ News →
Ireland