Higher inflation in Ireland is to persist “well into 2022”, the EU predicts, before gradually easing in 2023.
In its winter economic forecast, published on Thursday, the European Commission expects Irish inflation to reach 2.3pc on average in 2021, 3.1pc in 2022 and 1.5pc in 2023.
The 2022 figure is well above the EU and eurozone average and is higher than both the Government and Central Bank forecasts for the Irish economy.
“While energy was by far the largest driver, services inflation has also picked up amidst re-opening and simultaneous hiring in the sector,” the Commission said in its forecast for Ireland.
“These drivers are expected to persist well into 2022, thereby temporarily accelerating inflation, before price pressures gradually dissipate in 2023.”
Irish inflation is expected to have hit a high of 5.1pc in October, according to the EU's statistics agency, Eurostat, a level not seen since the boom years. The Central Statistics Office will update its own forecast next week.
UCD economist Karl Whelan told the Oireachtas on Wednesday evening that it was “a good thing” the Government had not reduced VAT rates in the Budget or sent out restaurant vouchers to households, which he said could “fan the flames of what is already an uncomfortably high level inflation”.
Buoyant growth is increasingly being driven by domestic companies and consumers, the Commission said on Thursday, with the activities of multinationals set to dissipate in the coming years.
“While investment activities of multinational companies remain volatile, they are assumed to follow a much more subdued trend compared to their surge in previous years, which will also lower imports in 2021,” the forecast said.
The Commission predicts an expansion in gross domestic product (GDP) - which is often inflated due to the multinational sector - of 14.6pc in 2021, slightly lower than Government and Central Bank forecasts.
GDP should moderate to 5.1pc in 2022 and 4.1pc in 2023, the EU said, in line with Irish forecasts.
It predicts modified domestic demand - which strips out multinational income such as IP assets and aircraft leasing - of 7.3pc in 2021, two points ahead of official Irish forecasts.
That should fall back to 5.3pc in 2022 and 3.2pc in 2023, at least one point below Irish estimates.
The upbeat Irish forecast mirrors the more optimistic view of the EU economy generally, with GDP set to expand by 5pc this year, 4.3pc in 2022 and 2.5pc in 2023, with the eurozone mirroring those rates until 2023 (2.4pc).
EU inflation is forecast to peak this year at 2.6pc (2.4pc in the eurozone) before declining to 2.5pc in 2022 (2.2pc in the eurozone) and 1.6pc in 2023 (1.4pc in the eurozone) as energy prices normalise.
Supply shortages, inflation and the potential for new Covid outbreaks are “key threats" to the recovery, economy commissioner Paolo Gentiloni warned, saying the EU would “remain vigilant and act as needed”.
Commission vice-president Valdis Dombrovskis said the bloc would “closely monitor inflation and adjust our policies if needed”.
