The Economic and Social Research Institute has warned of “second-round effects” on prices later this year as a result of higher energy costs.
In its latest Quarterly Economic Commentary, the ESRI said there is typically a nine-month lag between increases in fuel and food prices, suggesting even higher grocery bills in the autumn and winter, reports RTE.
Lower and middle income households may require support but this should be temporary and targeted, according to the institute.
It has revised upwards its forecasts for inflation to 3.7% for 2026 and 3.1% for 2027, reports RTE.
The ESRI also upgraded its forecast for economic growth, as measured by Modified Domestic Demand, to 2.6% for 2026.
The upward revision is linked to stronger than anticipated investment on the back of stronger housing output and rising investment in technology equipment related to artificial intelligence and data centres, reports RTE.
“International headwinds are strong; fossil fuel prices remain elevated, and uncertainty remains around the conflict in the Middle East,” said report author Professor Conor O’Toole.
“These higher prices are likely to raise consumer prices in Ireland this year and next to a greater extent than previously anticipated,” Prof O’Toole said, reports RTE.
In its assessment, the ESRI described the fuel support package that followed protests earlier this year as “poorly targeted” and said the structure of the supports was “disappointing.”
According to the report, the ready availability of revenue, and hence the weakened budget constraints, along with intense political pressure, provided conditions for sub-optimal policies, reports RTE.
The ESRI said that upcoming public sector pay talks provide the next setting in which this mix of readily available funds and political pressure will apply.
“In that context, it is important that the upcoming public sector pay talks are based on a clear understanding of the public finances vulnerabilities,” said report author Professor Alan Barrett, reports RTE.
Speaking in the Dáil, Tánaiste and Minister for Finance Simon Harris said there will be “no cliff edge” at the end of July when current excise cuts on fuel are due to expire.
He said that a decision would be made in the coming days on whether to continue the reductions, reports RTE.
Sinn Féin Spokesperson on Finance Pearse Doherty said that people were aghast at the suggestion that fuel prices could rise, and asked the minister whether he would rule out that diesel would go up by 32 cent on 1 August.
“It is really worrying for people in this cost of living crisis,” he said, reports RTE.
Mr Harris said it was necessary to leave the decision for “the coming days” because the situation is very fluid and volatile.
“I don’t believe there will be some sort of cliff edge where everything will return to where it was before the package.
“We will have to think this through and see what is an appropriate and proportionate response,” reports RTE.
Mr Harris also said that he could not ignore that the price of oil is falling, the Strait of Hormuz is open, and the price of diesel is below the price of petrol.
“The situation is different factually to when we brought in the original package,” reports RTE.
Meanwhile, Labour accused the Government of doing a “big fat nothing” to help households cope with rising prices, with the party’s finance spokesperson Ged Nash citing the Barnardo’s survey which found that one in five families are cutting back on food due to rising costs.
He said the Government had done nothing since the last election to help with energy and food price hikes, but Simon Harris defended the Government’s record saying it had delivered one of the largest fuel price packages in the EU, reports RTE.
Mr Nash also criticised the VAT cut for the hospitality sector, describing it as an extremely blunt instrument and arguing that targeted supports should be used instead.
Mr Harris stood over the VAT cut, saying it was not about reducing the cost of coffee but would instead protect 150,000 jobs in the sector, reports RTE.
The ESRI has revised its annual forecast for housing completions up to 38,500 for 2026 and 40,500 for 2027.
“However, the absence of sustained upward momentum in planning permission figures presents a challenge to raising output substantially and meeting housing targets in the medium term,” the report states, reports RTE.
“Given the failure to meet housing targets in the recent past and the expectation of continued shortfalls relative to demand, the housing deficit will continue to grow,” the ESRI said.
The ESRI’s outlook for the labour market remains broadly positive and the report authors expect unemployment to remain low, reports RTE.
However, the commentary analyses research on the possible impact of artificial intelligence on the Irish labour market, with the report concluding: “These studies point to considerable numbers who could be negatively impacted, highlighting the need for close attention to this area.”
Speaking on RTÉ’s Morning Ireland, Prof O’Toole said the ESRI’s research suggests that tailored and targeted measures using the social welfare system are better than broad-based ones, reports RTE.
Asked about the impact of artificial intelligence on jobs, he said that the research is in its infancy but that in any economy there will be roles affected by new technologies and roles that will be supported by them.
“So, I think there’s certainly a risk that there are roles in Ireland that will be replaced and that will affect the broader labour market functionality,” reports RTE.
He added: “New roles are created all the time and they can push the labour market forward. So, it really is a balance between those two and it’s probably too early to tell,” reports RTE.
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