Irish households face large hit to incomes as food drives inflation to 8% this summer

The Central Bank predicts the effects of the invasion of Ukraine will weigh on the Irish economy for at least the next two years

Mark Cassidy, director of economics and statistics at the Central Bank of Ireland: 'Clearly, the economic effects of the invasion of Ukraine have added considerable uncertainty.'

Hefty price hikes for food products will add to existing energy costs to drive inflation to 8% by the summer, helping to deliver a major blow to Irish household incomes, the Central Bank has warned. 

Its latest quarterly report predicts the effects of the invasion of Ukraine will weigh on the Irish economy for at least the next two years, as inflation stays higher for longer and price increases act as a drag on income growth, despite a quickening pace in wages growth.  

The Central Bank "substantially" scaled back the very strong economic growth numbers it forecast in January.     

Still, it emphasised that modified domestic demand — a reliable measure for growth in the domestic economy — will grow 4.8% this year and 4.3% in 2023 even as consumption expands less strongly than it thought a few months ago.  

Employment to expand

Employment will continue to expand and the Government's annual budget will be back in surplus in 2023, despite the higher than anticipated spending entailed by the humanitarian efforts, according to the forecasts.  

Specifically, the Central Bank sees the Government's contingency fund covering the €1bn cost it projects of taking in refugees fleeing the war this year. The humanitarian costs for the exchequer will rise to €2.5bn next year and amount to €1bn in 2024, it projects.   

"Clearly, the economic effects of the invasion of Ukraine have added considerable uncertainty and will undoubtedly weigh on growth and real incomes over the coming years and most notably higher inflation, as well as greater uncertainty and negative sentiment effects all imply headwinds to growth compared with our last bulletin,"  said Mark Cassidy, director of economics and statistics at the Central Bank.  

Wage growth is expected to grow strongly in the next two years, increasing 4.7% in 2023 and by over 5% in 2024. However, household incomes will fail to keep pace with inflation, in the short term.                     

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

"While wage growth is forecast to pick up in nominal terms, it is projected to be outpaced by overall HICP inflation — meaning that wages are projected to decline this year in real terms. These effects will be felt most acutely by those in the lower deciles of the income distribution," it said. 

'Lower consumption growth'

The Central Bank said that most households cannot avoid the price increases which "will likely lead to lower consumption growth than previously expected".  

"Although the economy is still projected to grow, the central outlook is for a slower pace of expansion with markedly higher inflation over the short term than previously expected," according to the report.

"The prospect of weaker foreign demand and more challenging conditions for domestic consumption and investment activity clouds what would otherwise be a favourable outlook for the Irish economy," said the Central Bank.