Chief Economist with the European Central Bank Philip Lane said food inflation is going to be one of the main drivers of overall inflation into next year.
It comes as the price of oil is rising again, costing over $90 for a barrel of brent crude oil, as efforts to end the US war with Iran fail.
Mr Lane said the rise of inflation depends on energy prices, including both oil and gas.
He said “it really is an uncertain situation” but that inflation will hover at 3% for the rest of the year.
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Speaking on RTÉ’s Morning Ireland, Mr Lane said: “It is not like the 10% we had in 2022, but 3% is still well above the 2% target that we have.”
Mr Lane said food inflation across Europe is relatively low at the moment.
“There has been big food price increases over the last several years.
“These weather events, like El Nino, predictably will lead to more pressure on inflation. In fact, our calculations say this is mostly going to be into 2027,” he said.
Adding: “This is something that in summer 2027 will be most visible.”
Mr Lane said firms are assessing if they can pass through price increases or are asking if they have to absorb it through lower profitability as well as considering scaling back activity levels.
He said it was important to look at the effect of both demand and activity levels.
“Right now, the European economy is growing, the most recent data has the European economy growing 0.3%, 0.4% in the second quarter, which in the European context is not too bad.
“If we have an open-ended war in the Middle East with no resolution, the fairly benign impact on the world economy, that may change,” he said.
Mr Lane said there are a “lot of open questions”.
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On whether there will be another rise in interest rates, Mr Lane said the rate decisions will be driven by what needs to be done for inflation to remain at 2%.
He stressed that side-by-side with that, is how quickly the economy growing. “let’s see the impact of the war later this year,” he said.
“What we found out from these years, inflation is so important in the cost-of-living crisis, inflation really affects people on lower incomes more than higher incomes.
“It is a false economy … to say let’s avoid rate increases because of the impact on mortgages, if the cost of that is overall inflation remaining too high for too long,” he said.
Mr Lane said one of the big issues is the impact of Artificial Intelligence on the world economy.
Watch: Chief economist says food inflation will be driver of overall inflation next year
He said the most vulnerable people need financial support but said the Government must avoid having subsidy schemes that are too general where “people who don’t need the money receive it”.
Mr Lane said these subsidies must be temporary, targeted and “tailored to those who most need it”.
He said there are very strong pressures on public spending in Ireland and across Europe – demography, climate change, defence and AI.
However, he stressed that discipline is needed and the Government must recognise that it is dangerous for a misalignment to exist between spending and sustainable tax revenues.
He said this is “not easy in Ireland with the volatility in corporation tax”.
He said as the October budget comes along, maintaining a medium-term fiscal discipline is important.
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Read more: World faces fresh food price surge, UN agency warns
