According to the European Commission’s spring forecasts, Irish inflation is expected to ease this year but remain at elevated levels, despite the fall in energy and food prices. The EU projects that Irish inflation will slow to an average rate of 4.6% this year, down from its current rate of around 7%. Inflation is then seen falling to an average rate of 2.6% in 2024. The EU inflation forecast is below the 4.9% inflation rate this year the Department of Finance forecast in April in its spring update, but is in line with its 2.5% inflation projection for 2024.
Compared to other countries, the new EU forecasts suggest that Irish inflation pressures are running cooler than in France and significantly cooler compared to Germany, where the EU projects inflation will run at an average of 6.8%. Despite the inflation, Ireland will continue to be Europe’s fastest-growing economy, and unemployment at 4.3% will remain close to historically low levels. This suggests the economy is “operating at full employment,” and wages are likely to rise significantly. GDP will expand 5.5% and by 5% this year and in 2024, respectively. These forecasts compare with the 5.6% and 4.1% rates projected by the Department of Finance last month.
The EU forecasts also suggest that the Irish exchequer will continue to be one of the richest in Europe, with the State expected to run budget surpluses this year and in 2024. This is helped by the billions in euro flowing in from corporation tax receipts from multinationals.
The inflation numbers from the commission are closely watched for clues on how long the European Central Bank (ECB) will continue on its cycle of hiking interest rates, which are designed to rein in price pressures across the eurozone. Its rate decisions are decided in terms of price pressures and meeting its medium target for inflation of around 2% across the eurozone, a target that pivots on price pressures in the largest eurozone economies. The ECB has repeatedly highlighted the dangers of price pressures becoming embedded and has warned about pressures staying “too high for too long,” citing measures of core inflation that strip out energy and food prices from the headline rates.
In a commentary, commission executive vice-president Valdis Dombrovskis highlighted that core inflation is remaining at stubbornly high levels in the EU. “The European economy is in better shape than we projected last autumn. Thanks to determined efforts to strengthen our energy security, a remarkably resilient labour market and easing supply constraints, we avoided a winter recession and are set for moderate growth this year and next. Inflation has proved stickier than expected but it is forecast to decline gradually over the remainder of 2023 and in 2024. And the improvement in public finances is set to continue as energy support measures are progressively withdrawn,” he said.