5th Oct 2022 12:02
(Alliance News) - The Central Bank of Ireland has warned that inflation has become more widespread and 180,000 families are most at risk of further increases in prices.
It is forecasting inflation at 8% for the year, falling to 6.3% next year.
The bank's quarterly review, published on Wednesday, predicts a sharp slowdown in economic activity in the second half of this year, followed by a further slowdown next year and in 2024.
Modified domestic demand, a measure of domestic economic activity, is forecast to grow by 6.4% by the end of 2022, by 2.3% in 2023, and by 3.3% in 2024.
"Consumer price increases, while still driven by energy, have become more broadly-based," it said, and despite many households being "fairly resilient to cost of living increases, fragilities remain".
Unemployment is set to increase from 4.7% in 2022 to 5.1% next year, and down to 4.8% in 2024, it said.
The Central Bank also pointed out that more than 14% of households, or around 180,000 families, report that they already spend all their income on a regular basis, and have no savings.
These economically precarious households are more likely to be younger, female-led, unemployed or economically inactive, and renting, it said.
"The simulation analysis indicates their economic resilience is likely to deteriorate further if prices continue to rise because essentials make up a high share of their consumption.
"Combined with their available income and low level of savings, a further deterioration in resilience is expected if prices of essentials increase further.
"These already marginal households have limited financial means to meet additional price increases."
It added that temporary policies which target supports to households who spend most of their income on essentials may be more effective than universal supports, or more permanent supports.
"Not only are a temporary and targeted set of policy measures more fiscally sustainable, they will limit the knock-on inflationary effects," it said.
In relation to Budget 2023, announced last week, the Central Bank analysis said that more than half of the measures "would appear to be untargeted and may run the risk of adding to medium-term inflation".
But it added that if it were to have an impact, it is likely be "negligible" in comparison with the other potential drivers of inflation, such as energy.
It also said that the announcement of significant interventions in the UK economy could have "slightly negative" implications for Ireland.
"Given recent developments in the UK, a less favourable growth path there would have slightly negative implications for the growth forecast, while a larger appreciation of the euro vis a vis sterling would imply weaker inflation."
Finance Minister Paschal Donohoe said the Budget was aimed at helping households and businesses in targeted ways.
Speaking in Tullamore on Wednesday, he said: "The analysis that has been published by the Central Bank is very much in line with the thinking that underpinned Budget 2023.
"We recognise the risks that our economy faces at the moment. What we have done in the Budget is aimed to help both households and businesses in targeted ways, while bringing in measures that will provide help to all, as we're all experiencing higher energy bills later in the year.
"One of the points the Central Bank makes is that the measures may need to be reconsidered as we move through 2023 and we may find ourselves facing new economic challenges.
"But this is the whole reason that we're trying to run a budget surplus in the first place.
"It's the reason why we'll also look at the role of windfall taxes as well in 2023.
"The government will consider a further intervention if needed as the year goes on. The measures that we've brought in are for a six-month duration, they're broad, they're exceptional in nature.
"Independent analysis has shown they can have a big impact on those who really need help and we'll evaluate where we are at each point in dealing with this latest challenge of rising inflation."
By Grainne Ni Aodha, PA
source: PA
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