Central Bank revises down inflation forecast

Bank now expecting inflation for 2023 to run at 5%, revised down from 6.3%, while core inflation — which excludes food and energy prices — is expected to run at 3.5%

Energy prices will be a much smaller feature of inflation in 2023, whereas food and more domestic services inflation are set to become more prominent.

The Central Bank has revised down its inflation forecast for this year to 5% but uncertainty still remains due to the potential for energy shocks or escalating geopolitical tensions.

It also sees fairly modest growth in the Irish domestic economy over the next few years compared to previously high annual rates.

In its latest quarterly bulletin, the Central Bank suggests annual headline inflation rates peaked in July last year at 9.6%. In February, 8% annual inflation was recorded.

It is now expecting inflation for 2023 to run at 5%, revised down from 6.3%, while core inflation — which excludes food and energy prices — is expected to run at 3.5%. However, core inflation is forecast to be more persistent in the coming years.

Energy prices will be a much smaller feature of inflation in 2023, whereas food and more domestic services inflation are set to become more prominent. 

Inflation is forecasted to decline further to 3.2% in 2024 and to 2.2% in 2025.

Director of economics and statistics with the Central Bank Robert Kelly
said “uncertainty remains high” but the risks to domestic growth outlooks are “now less tilted to the downside” compared to its previous bulletin.

Since the last Central Bank bulletin in October, futures prices for oil and gas on the international markets have fallen following a reduction in uncertainty since the outbreak of the war in Ukraine.

Mr Kelly said there was “significant” uncertainty over the extent to which inflation would remain elevated.

Among the issues cited were the outlook of the global economy — particularly the reopening of China and its demands for energy — tightening monetary policy, as the potential escalating geopolitical tensions.

MDD — an alternative measure of economic activity which more accurately reflects the activities of Irish households and businesses in the domestic economy — is projected to be 3.1% this year, a drop from the 8.2% growth recorded in 2022.

It is expected to drop further in 2024 to 2.9% and to 2.6% in 2025.

GDP is also expected to drop from the 12% recorded in 2022 to 5.6% this year.

On the housing front, the Central Bank said just 27,000 homes would be built this year, down from the 29,000 recorded in 2022. 

New completions will be constrained by labour, material shortages and increases in construction input costs. However, home completions will increase in 2024 and 2025 to 29,500 units and 32,500 units respectively. 

Unemployment is expected to average out at 4.4% over the coming years, with the Central Bank projecting the labour market remaining tight. Labour shortages will be the main factor limiting business activity. 

As a result, wages are expected to increase this year and next by 6.4% and 5.2% respectively. 

Real household disposable income is also expected to increase this year, following a decline in 2022.

However, the Central Bank also pointed out that the cost-of-living measures introduced to mitigate inflation were “significant”, they should be “unwound” in a "timely fashion" to reduce the potential of adding to inflationary pressures.