Inflation expected to dampen domestic economic growth

New report warns inflation 'may rise further if oil and gas prices remain elevated'

Consumer spending growth is to slow from 2.6% in 2025 to 2.3% this year, and 2.1% next year.

The Irish domestic economy is expected to see growth over the coming years supported by investment, housing, and public infrastructure spending, but the higher rates of inflation is expected to slow the rate of expansion, a new report has said.

The Autumn 2026 AIB Economic Outlook Report said that modified domestic demand (MDD) is expected to grow by 3.8% over the course of this year before slowing to 3.1% next year. 

Consumer spending growth is to slow from 2.6% in 2025 to 2.3% this year, and 2.1% next year.

The report expects the harmonised index of consumer prices — a measure of inflation that allows for a comparison between EU members — to  peak around 4.5% during the final quarter of the year.

Chief economist at AIB David McNamara said he expects inflation to peak in the next couple of months “before the end of the year” but added that there’s a “lot of uncertainty around that forecast”.

Headline inflation in Ireland reached 4.1% in September and the report warns that it “may rise further if oil and gas prices remain elevated”.

While inflation is expected to fall, it will remained elevated at around 3.1% next year and remain well above the 2% medium term target. 

Mr McNamara said “we do expect weaker consumer spending growth” which will be slower this year as a result of higher inflation.

Real disposable income growth is expected to be flat this year, when adjusted for inflation, before picking back up in 2027.

“Households remain cautious and the household savings rate has risen to around 20%. This trend is expected to continue, as factors such as global uncertainty and ageing demographics boost savings behaviour,” the report said.

Mr McNamara said despite the slowing consumer spending and the higher levels of inflation, the “domestic economy is expected to continue expanding, supported by investment, housing delivery and public infrastructure”.

On the investment side, the report noted a surge in investment in late 2025 in machinery, equipment, and software continued into 2026 with much of this going towards investment related to fit-out of data centres and related software which was “likely related to the AI investment cycle”.

“Business investment is also being boosted by the deployment of AI technology by firms in Ireland, a trend which is now emerging clearly across the European economy.” 

The report said it expects exports, which have been boosted in recent years by pharmaceuticals and more recently by semiconductor and IT services activity, to grow by 2.8% this year before rising to 5.7% next year.

“AI-related exports are now growing quickly off a low base, accounting for nearly 13% of all customs goods exports so far in 2026, versus just 6% in 2025,” the report said.

In terms of housing, the report expects new housing completions to reach 39,000 this year before growing further to 41,000 next year, and 45,000 in 2028.

“Delivery on key infrastructure in relation to water, sewage and energy will be vital to the sector being able to deliver over 45,000 units on a sustained basis,” the report said.

However, the report noted that the Middle East conflict has “some downside risk” to supply expectations for 2027 and 2028 in the construction sector.

It added that there is the possibility of projects being “put on hold amid a more prolonged conflict and the associated elevated levels of uncertainty”.