Living standards face huge hit this year but no major  economic crisis on cards, says Central Bank

For the year as a whole, consumer prices will grow 7.8% and then fall back to the still-elevated average level of 4.2% in 2023, the new forecasts show. File Picture: Reuters/Clodagh Kilcoyne

Irish households face a huge hit to their living standards this year, but the inflation crisis won't spark a major economic crisis, as long as the fallout from the Ukraine doesn't deepen, new Central Bank figures predict.

In its latest quarterly outlook, the Central Bank said consumer price inflation will climb higher than it previously predicted in its April report, and now sees inflation  peaking at a higher-than-expected level of over 10% in the coming months.

For the year as a whole, consumer prices will grow 7.8% and then fall back to the still-elevated average level of 4.2% in 2023, the new forecasts show.

Irish living standards, as tracked by real household disposable income, will fall this year by 3.3%, the sharpest drop since the banking and property market collapse over a decade ago, said Mark Cassidy, director of economics and statistics at the Central Bank.       

Surging prices are hitting confidence and weighing on consumption and investment growth, but is not leading to an unemployment crisis and businesses continue to face staff shortages, Mr Cassidy said. 

"That is the nature of the economic challenge at the moment," he told reporters.   

And the new forecasts point to household disposable income growing again in each of the next two years, as wages across the economy grow rapidly.

Growth in compensation per employee, which the reports says will accelerate to 6.6% in 2023, and continue to expand rapidly, by 5.5%, in 2024, will on a broad basis help compensate many households for price increases.

Mark Cassidy, director of economics and statistics, at the Central Bank

However, wages growth is concentrated to some businesses and shortages of workers in many parts of the economy will persist, but will unlikely spur a second round of inflation pressures. 

There was no evidence of "a wage-price spiral", Mr Cassidy said, but adding less profitable businesses would be forced to pass on higher labour costs by hiking prices. 

The Central Bank cut its forecast for growth this year in the domestic economy to 4.3%, as measured by modified demand, but dramatically hiked its prediction for GDP growth to over 9%, which takes into account  the remarkable output of the multinationals. 

However, a prolonged Russia-Ukraine conflict that led to Russia cutting oil and gas supplies to world markets would weigh considerably on growth here, the Central Bank warned.    

Housing output is facing a further challenge from "substantial" hikes in building material costs.

The Central Bank predicts 31,000 houses will be built in 2024, up from 23,500 units completed this year, but still meaning 5,000 fewer homes will be built between 2022 and 2024 than it previously thought.                                           

It reiterated its warning to Government about relying on a handful of big international companies to provide an outsized slice of the State's tax revenues. 

The sustainability of corporation receipts was the "biggest risk" to the public finances  and setting aside funds by some means, possibly including into a rainy day fund, "make a lot of sense", Mr Cassidy said.