Irish Central Bank Forecasts 3.5% Inflation Amid Geopolitical Shocks and Iran War

The Central Bank of Ireland forecasts 3.5% average inflation for the Irish economy this year, up from 2.9% in March, primarily due to global geopolitical shocks, particularly the conflict in Iran and its impact on energy prices. In a more adverse scenario, if the Strait of Hormuz remains closed longer, inflation could reach 5%.

Donald Trump claimed his recent peace deal with Iran averted a «worldwide depression,» despite the agreement being only for further negotiations. This conflict, sparked by US-Israeli bombings in February and a blockade of the Strait of Hormuz, has caused significant global economic harm and thousands of lives lost.

Central Bank Governor Gabriel Makhlouf highlighted geopolitical storms as a top concern, stating, «we have zero control over that.» Martin O’Brien, head of economic analysis, noted that a quick return to normal activity in the Strait of Hormuz is unlikely, impacting oil and shipping prices, which will increase import costs for Irish consumers. The bank's economists now believe there is no returning to previous baseline assumptions.

Beyond energy, the inflation shock is spreading to other consumer spending areas, with substantial increases expected in food inflation. While the multinational-dominated business economy is projected for strong growth, individual households face troubling forecasts. Wages are expected to grow by 4%, but with 3.5% inflation, real income gains will be minimal. If inflation hits 5%, the impact will be more acute. Gross disposable income per household is expected to fall by 1% this year due to rising inflation, weaker job creation, and increasing unemployment, necessitating government intervention.