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Penny pinching Price hikes for housing, food and fuel to soar to 40-year highs amid Ukraine war

Wages and government supports are unlikely to keep pace with average inflation of 6.7pc for the year.

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Stock image

Stock image

Stock image

Russia's war on Ukraine is set to usher in 1980s-style inflation in Ireland, with rising fuel, food and housing costs straining household budgets.

Prices rises are expected to peak at around 8.5pc this summer, according to the Economic and Social Research Institute (ESRI). It is a level not seen since 1984.

Wages and government supports are unlikely to keep pace with average inflation of 6.7pc for the year.

This means disposable income could fall by around 2pc, the ESRI said in its quarterly economic commentary.

"[Inflation] is likely to peak in mid-summer before falling back somewhat towards the end of the year," ESRI research professor Kieran McQuinn said.

Energy and food costs are already rising as a result of the pandemic, with consumer price inflation hitting 5.6pc in February.

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Household budgets will continue to be stretched further over the course of the year. Photo: Stock image

Household budgets will continue to be stretched further over the course of the year. Photo: Stock image

Household budgets will continue to be stretched further over the course of the year. Photo: Stock image

The war will put further strain on oil and gas, cereal, cooking oil, fertiliser and metals exports from Russia and Ukraine. This will lead to hikes in the cost of home heating, transport, electronic goods, building materials and basic foods such as bread and pasta.

Housing completions could suffer due to more expensive materials and supply delays. A 1pc increase in building costs lowers new supply by around 1.4pc, the ESRI estimates.

"We would stress there is a lot of uncertainty around these figures. It may well be the case you could see inflationary pressures being more acute than that," Mr McQuinn said.

Price rises will slow down later in 2022 but inflation is set to remain high in 2023, at 5pc. The forecast marks a major upward revision on previous ESRI predictions, which saw inflation peaking at around 6pc this month.

It puts more pressure on the Government to help cushion the blow to households and firms, Mr McQuinn said.

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"There may well be a need for further measures down the line, as far as the Government is concerned. You may see, for example, further transfers to households to deal with the higher inflationary pressures.

"There may be a need for support to sectors that are particularly impacted by the overall deteriorating geopolitical situation. A lot will depend on the duration and scale of the conflict."

More subsidies, along with the cost of housing a growing number of Ukrainian refugees, could have a "serious impact" on the small budget surplus (0.2pc of GDP) the ESRI is predicting.

Public Expenditure Minister Michael McGrath estimates the cost of housing Ukrainians fleeing the war at "hundreds of millions" of euro, but insisted it is the right thing to do and that Ireland can afford it.

Russia's invasion of Ukraine last month has led to several rounds of international sanctions that are expected to slow Ireland's economic growth, following a double-digit expansion last year.

The ESRI sees gross domestic product (GDP) growing by 6.2pc this year, which is still likely to be well above the EU average.

Modified domestic demand (MDD), which strips out volatile aircraft leasing and patent income, and is a better measure of the indigenous economy, is forecast to expand by 5pc.

Last December the ESRI was predicting the foreign and domestic sectors would see a 7pc boost in 2022.

On the jobs front, unemployment is set to fall to 6.3pc this year and under 5pc next year.

But with the job vacancy rate more than doubling last year in Covid-hit sectors such as construction, retail, accommodation and the arts, the ESRI points to the "risk" of rising wages feeding back into even higher prices.

While Ireland's direct trade with Ukraine, Russia and Belarus - which was also caught in the sanctions net - amounts to just 1pc of total trade, the economic effects of the war could be more severe here if our larger trading partners take a hit.

The longer the conflict lasts, the greater the potential fall in domestic and foreign investment into Ireland.

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