The current high rate of inflation should ease later this year but Ireland's rate will remain elevated, above the euro area average and above pre-pandemic levels, Central Bank governor Gabriel Makhlouf has warned.
Speaking at a webinar event hosted by the Institute of Directors, Mr Makhlouf said inflation in Ireland has been higher than the rest of the euro area and he expected that trend to continue.
Inflation here rose to a 20-year high of 5.5 per cent in December, compared to a headline rate of 5 per cent for the euro area.
Issues
This elevated level of price growth would decline later this year “as supply chain issues unwind and energy prices stabilise” but this prediction was subject to upside risk, he said.
Mr Makhlouf described the recent surge in energy prices, the main driver of inflation here, as "spectacular". Gas prices in Europe rose by 470 per cent on an annual basis last year while crude oil and coal were up by 87 and 140 per cent repsectively.
According to Bank of America, the average European household faces electricity and gas bills of €1,850 in 2022, up from €1,200 in 2020.
“We expect energy prices to moderate, but it may take time for people to experience it in view of the lag between wholesale and consumer prices,” Mr Makhlouf said, noting Ireland was a small open economy therefore imported a lot of inflation.
“Distinguishing between broad-based changes in the general price level and idiosyncratic, temporary, relative price changes is important when thinking about inflation in months and years to come,” he said.
Having reached highs of 5 per cent in December, inflation across the euro area is expected to remain elevated in the near term, Mr Makhlouf said.
Forecasts
“We expect it to remain above 2 per cent for most of this year but our forecasts project it to settle below our 2 per cent target in 2023 and 2024,” he said.
Mr Makhlouf said the Irish economy was proving “very resilient” to the pandemic. “Each successive wave of the virus is having a reduced economic impact, and we expect this trajectory to continue,” he said.
“Most sectors of the economy expanded strongly towards the end of last year. Consumer activity picked up strongly in the lead-up to Christmas with a significant decline in household deposits and increase in card spending,” he said, noting, the stock of deposits, a proxy for savings, remains at high levels.
“As a result, we are seeing a strong growth in domestic demand, led by consumption, supported by rapidly improving developments in the labour market, with high levels of labour force participation and employment,” he said.
