Irish households are hit hard by their incomes, with food pushing inflation up to 8% this summer

Sharp food price increases will raise existing energy costs to push inflation to 8% by summer, helping to deal a heavy blow to Irish household incomes, the Central Bank has warned.

Its latest quarterly report predicts the effects of the Ukraine invasion will weigh on the Irish economy for at least the next two years as inflation stays higher for longer and price rises dampen income growth, despite the acceleration in the rate of wage growth. .

The Central Bank has “substantially” revised downwards the very strong economic growth figures it forecast in January.

Still, he pointed out that modified domestic demand – a reliable measure of the growth of the national economy – will increase by 4.8% this year and 4.3% in 2023, even if consumption increases less strongly than it did. didn’t think so a few months ago.

Job to develop

Employment will continue to grow and the government’s annual budget will once again be in surplus in 2023, despite higher-than-expected spending driven by humanitarian efforts, according to forecasts.

Specifically, the Central Bank sees the government’s provident fund covering the cost of the €1 billion it plans to host refugees fleeing war this year. Humanitarian costs for the Treasury will amount to 2.5 billion euros next year and will rise to 1 billion euros in 2024, he predicts.

“Clearly, the economic effects of the invasion of Ukraine have added considerable uncertainty and will undoubtedly weigh on growth and real incomes over the next few years, and more particularly on higher inflation, as well that on greater uncertainty and negative sentiment effects all imply headwinds to growth compared to our last bulletin,” said Mark Cassidy, director of economics and statistics at the Central Bank.

Wage growth is expected to grow strongly over the next two years, increasing by 4.7% in 2023 and over 5% in 2024. However, household incomes will not keep up with inflation, in the short term.

“The series of energy price increases and higher inflation rates expected this year will reduce household incomes in real terms, with knock-on effects on domestic demand growth,” the report said.

“While wage growth is expected to pick up in nominal terms, it is expected to be overtaken by headline HICP inflation, which means wages are expected to fall this year in real terms. These effects will be felt most harshly by those in the bottom deciles of the income distribution,” he said.

“Slower growth in consumption”

The Central Bank said most households cannot avoid price hikes that “will likely lead to weaker than expected consumption growth.”

“Although the economy is still expected to grow, the central outlook is for a slower pace of expansion with significantly higher inflation in the near term than expected,” according to the report.

“The prospect of weaker foreign demand and more difficult conditions for domestic consumption and investment activity clouds what would otherwise be a favorable outlook for the Irish economy,” the central bank said.

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