Central Bank: US-Israeli War to Wipe Out Irish Wage Increases, Inflation to Rise

The Central Bank of Ireland warns that surging energy prices from the US-Israeli war with Iran will negate Irish wage increases this year. The regulator, in its second quarterly economic bulletin, raised its headline inflation expectations for 2026-2028, noting global energy prices are unlikely to return to pre-conflict levels.

Robert Kelly, director of economics and statistics, stated that gas and oil prices are expected to remain elevated into 2027 and 2028. This surge, driven by Iran's and the US's blockade of the Strait of Hormuz, has already accelerated Irish consumer price inflation and is spreading to other goods, including food.

Consumers are expected to reduce spending. While Q1 personal consumption was high, it largely preceded the conflict, with spending slowing in April. The Central Bank forecasts Irish wages to grow by 4% this year, but consumer prices are expected to rise by 3.5%, resulting in only 0.5% real wage growth. This will disproportionately affect vulnerable households, necessitating targeted support in Budget 2027, potentially via the social welfare system.

In an adverse scenario with prolonged conflict, Irish inflation could reach almost 5% this year. Despite inflation concerns, the domestic economy is still projected to grow strongly by 3.3% this year, a 0.4 percentage point increase from March's forecast, largely due to multinational investment in AI infrastructure and data centers.