Chapter 1: What is the current inflation forecast for Ireland?
First this morning, Ireland's inflation rate could surpass 7% this year in a worst-case scenario if the oil crisis sparked by the war in the Middle East continues into the second half of 2026. That's according to the AIB Economic Outlook report from May released today. But what's the likelihood this could happen? And if it does, what impact could it have on our wallets?
Dan O'Brien is Chief Economist with the Institute of International Affairs and columnist with thecurrency.ie. He joins me on the line. Morning, Dan.
Good morning, David.
Now, as I say, this is a worst case scenario, which we all fervently hope will not come to pass. What do you make of the forecast?
Well, the main forecast is that inflation will rise by 4%. So we'll get prices in the economy, the basket of goods and services that we all purchase, will be 4% higher in 2026 than 2025. Now, that's a perfectly reasonable, plausible scenario. And that's what the excellent economist at AIB is saying is most likely to happen. I think he's absolutely right.
We're seeing an increase in inflation because of energy prices are going up. But the important thing is this is not 2022. OK, everyone is sort of thinking we had the invasion of Ukraine in 2022 and that caused huge inflation. No, we had huge inflation. It wasn't because of the war. Before Putin invaded Ukraine, inflation in Ireland was already running at six or seven percent.
That was because of the pandemic. So it's really important. People don't get worried about massive inflation. We don't have a pandemic now. Yes, we have slightly higher energy prices, but we've had higher energy prices many times over the decades. that hasn't led to runaway inflation. So it's important that people don't think this is a rerun of the post-pandemic inflation.
OK. Taking all of what you said on board, but I suppose the worry would be if the situation in the Strait of Hormuz doesn't get sorted out, it will lead to wider consequences for the global economy, obviously.
Look, the longer this goes on, the higher energy prices have gone.
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Chapter 2: What factors are contributing to the inflation rates?
And it's interesting to note, I'm actually really surprised that they haven't gone higher. You know, oil is running at about $100 a barrel. Now, if people cast their minds back as long ago as 2008, nearly 20 years ago, that was the highest ever oil price. So in today's money, it went up to $200 a barrel. We didn't get inflation then.
So people just need to be careful that oil and energy is much less important now
for our economies that are now mostly services then oil and gas were in the 1970s when we had we were dominated by agriculture particularly in this country agriculture is very energy intensive so economies have changed so we don't you know energy prices going up doesn't have the inflationary effect that it did in the 1970s we're not heading back to the 1970s thankfully
OK, so you would anticipate that 4% inflation is more likely. Does that trigger an increase in interest rates by the European Central Bank?
And it's not just AIB, but nearly all of the economists, whether it's the ESRI, the central bank, their figures are 3%, 4% as well. So people need to be reassured that we economists get many things wrong, but we're pretty good at predicting inflation because we've had many cases of oil prices and energy prices going up over the decades.
So when economists put those numbers into their models, they're pretty good at forecasting them. So most economists and all forecasters are not expecting 7%. They're expecting 4%. Only if things got much worse could it go to that.
Yeah, it's a worst-case scenario. Yeah, yeah. So it's a warning of what might happen but isn't likely.
Exactly.
So talk to me about interest rates.
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