THE CENTRAL BANK has revised its consumer price inflation forecasts up to 8% for this year, saying it reflects sharp increases in future prices of gas on wholesale markets. 

In its latest quarterly bulletin, published today, the regulator said energy-driven inflation is the key issue being faced currently and as a result, the outlook for domestic growth over the coming quarters is “more challenging than was previously expected”. 

“The labour market is performing well since the post-pandemic recovery, however significantly higher consumer prices and business costs are expected to impact both household spending and business investment in the short-term,” Robert Kenny, the Central Bank’s acting director of economic and statistics, said. 

The Central Bank noted that as inflationary pressure starts to ease through 2023, domestic growth is expected to pick up again in the second half of next year, while inflation is expected to move below 3.0% over 2024. 

“With the supply-side already experiencing constraints during the transition out of the pandemic, the economic implication of the Russian invasion of Ukraine is one of a large supply-side shock to the Irish and European economies,” Kenny said.

“As the disruption to energy, food and commodities markets has materialised, the knock-on, upward effects on consumer prices and consequent reduction in domestic purchasing power has become more substantial through 2022,” he said. 

Multiple energy suppliers have announced price increases recently, and Taoiseach Micheál Martin said last month that energy prices are “off the Richter scale” compared to last year.

Consumption

The Central Bank said the economic effects of the war in Ukraine, primarily rising energy prices and uncertainty about energy supplies, are ultimately leading to lower consumption and investment than would otherwise be the case. 

A large increase in investment in the first half of 2022, which the Central Bank said is likely more once-off in nature, means that the forecast for modified domestic demand (MDD) for all of 2022 is revised up. 

MDD is a measure encompassing personal, government and investment spending.

However, underlying this, it was noted, the expected growth during the second half of the year is revised down. 

The drag of higher inflation on disposable incomes is expected to maintain through the first half of next year, but ease thereafter. 

Average real household incomes are forecast to fall by 3.3% this year, and to remain relatively flat next year as a whole. 

“This expectation, coupled with more precautionary savings, means that consumer spending is projected to grow at a slower pace than previously predicted, particularly in 2023,” the Central Bank said.

MDD is forecast to grow by 6.4% this year, 2.3% next year and 3.3% in 2024. 

Inflation 

Consumer price inflation is being forecast to rise to up to 8% for 2022 and is also being revised up to 6.3% for 2023. 

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The Central Bank said these revisions reflect sharp increases in the future price of gas on wholesale markets since July. 

“Natural gas accounts for about half of electricity generated in Ireland, and increases in the price of gas, pass through to the retail price of electricity as well as gas for home heating,” the Central Bank noted. 

The Bank said that “higher electricity prices impact the wider economy as firms’ production costs also increase”.

Consequently, the Central Bank said, the expectation is that the pass-through of energy to other parts of the consumer basket will continue for some time, with inflation excluding energy expected to average 4.4% in 2023, revised up from 3.8% forecast in the July bulletin.

Upsides and downsides

The Central Bank said there remains upside risks to the inflation forecast and downside risk to the growth forecast.

“Much of the slowdown in growth forecast in the second half of this year and early next year is contingent on currently high energy prices stabilising, alongside a smooth transition to more sustainable energy supply,” the Bank said. 

“However, a more intense and protracted war in Ukraine or a further deterioration in energy or food supplies would result in a lower growth and higher inflation than outlined in the baseline forecast.

“A less favourable growth path for the UK would have slightly negative implications for the growth forecast, while a larger appreciation of the Euro vis-a-vis Sterling would imply weaker inflation than currenty forecast.”