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.
It said it is also 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.
It said its baseline forecast for inflation is that it would average 3.5% this year and 2.9% in 2027.
The Central Bank’s 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.”
It 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 Central 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.
It said this would erode fiscal buffers and limit the Government’s capacity to respond to future negative shocks.
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.
