War in Iran to have greater impact on oil prices than invasion of Ukraine, ESRI warns

The research institute has also warned against cutting indirect taxes such as excise duties, which disproportionately impact higher income households 

The ESRI has warned that a more prolonged conflict would imply higher energy prices, leading to increases across a wide range of goods and services and dampening economic activity.

Rising energy prices in the wake of the war in Iran are likely to persist for some time and could be even greater than the 2022 price hikes following the war in Ukraine, the Economic and Social Research Institute (ESRI) has warned.

In its latest quarterly economic commentary, the institute also warned against cutting indirect taxes on oil and gas prices, recommending more targeted measures for households most in need.

The ESRI has revised its inflation expectations significantly from an initial 2.1% in 2026 to 3.2%, with price hikes in gas and oil expected to bleed into other sectors such as construction. 

Price levels are now anticipated to be higher for longer, with inflation in 2027 expected to rise to 2.7%. 

The ESRI has warned that a more prolonged conflict would imply higher energy prices, leading to increases across a wide range of goods and services and dampening economic activity.

Oil prices higher than beginning of Ukraine war

It also warned that the war in Iran will have a greater impact on oil prices than the war in Ukraine. For gas, however, the price hikes arising from the crisis in Iran will be slightly less than the initial shocks in 2022 following Russia's invasion of Ukraine. 

Speaking in a media briefing, research professor at the ESRI Conor O'Toole said that while there were spikes in gas prices after the initial war in Ukraine, the institute was not forecasting a repeat of this now.

"In Ukraine, there was an initial spike [in gas prices], a moderation, and then a very large spike, about six quarters after. We are not expecting that to occur at this present moment in time," Mr O'Toole said. 

"However, we will always keep that under review. That depends on how developments occur in the Middle East."

The ESRI has also warned against the cutting of indirect taxes in the wake of the Government's measures to cut excise duties on petrol and diesel by 15c and 20c per litre respectively, noting that these policies did not target those who needed it the most.

"The greatest gains, in cash terms, actually go to the higher income groups," said Alan Barrett, research professor at the ESRI.

"That is because they have larger houses, larger cars, and so forth. This is something we have argued against," Mr Barrett noted, adding that excise cuts on petrol and diesel were not targeted measures.

Welfare changes 'most effective'

It said flat-rate energy credits were better targeted than indirect tax cuts, but that overall, welfare changes were the "most effective" means of approaching this challenge.

"Ideally, it would be welfare changes, including fuel allowances," said Mr Barrett.

"Targeting is critical. What the government has announced is a blend. Based on our own hierarchy, they've got some things right and some things less so."

The ESRI also warned that rising fuel prices could bleed into other areas of the economy, particularly in the housing sector.

Noting the delivery of homes and the government's housing targets, the ESRI found output to be significantly lower compared to the "well understood" amount of 50,000 homes a year if national targets are to be met. 

Last year saw housing output of just over 36,200, compared to just over 30,000 in 2024. The ESRI said that based on forward-looking indicators currently available, it was "difficult to see further upward momentum" in housing output.

For now, it said it expects housing output to remain in the mid-30,000s throughout 2026 and 2027. 

"A rise in energy prices will feed into any activities that rely on the use of fossil fuels, such as transportation costs," Mr O'Toole said.

"There is quite a sensitivity, historically, behind building costs and housing production. If you have inflation pressures feeding into those costs, we could have a dampening effect on output. We are not seeing it yet, but it remains a risk."

Economy to grow 'at slower pace'

The research institute said that while it expects the economy to grow this year and next, it will do so at a slower pace. 

It is forecasting modified domestic demand (MDD), a measure of economic activity that discounts distortions from multinationals, to grow by 2.1% in 2026, followed by 2.8% in 2027.

The ESRI said it will review its broader forecasts in light of the ongoing war in Iran.