Around half of all firms and workers are pricing in pay rises this year as the labour market tightens, according to Bank of Ireland’s latest economic pulse survey.
With 56pc of people surveyed saying it is easier to find or move jobs, 46pc of workers now expect to see a 3pc bump in wages in the next year.
A third of firms are finding it hard to fill jobs, with a record 50pc planning to increase basic pay by an average of 4pc.
A shortage of workers in key sectors such as construction and retail and a continued boost in activity in areas such as IT and pharmaceuticals is driving pay expectations, said Bank of Ireland chief economist Loretta O’Sullivan.
“It is very much to do with shortages in some sectors and [higher] productivity in others, more than the generalised cost of living,” Dr O’Sullivan said.
“As businesses look to retain and attract staff, and workers find it easier to get or change jobs, upward pressure on pay is likely.”
A report by consultants Grant Thornton, published at the weekend, found that while 85pc of Irish businesses are optimistic about the coming 12 months, 63pc expect to increase their prices, with 56pc saying the cost of labour was a barrier to growth.
Consumer prices rose for the 14th consecutive month in a row in December, and are up 5.5pc compared to December 2020 (5.7pc, according to the EU-harmonised measure).
Rising wages are not yet feeding into rising prices, a phenomenon known as ‘second-round effects’, Dr O’Sullivan said, with energy prices still driving inflation, especially on the back of the Russia-Ukraine standoff.
“There are risks for sure, especially with the geopolitical situation at the moment. We’re not seeing second-round effects, but the longer inflation persists, the bigger the risks are.”
The European Central Bank (ECB) is unlikely to bring forward any interest rate rises to counter higher prices at its meeting on Thursday, analysts say, despite the US Federal Reserve and the Bank of England moving in that direction.
“The ECB has a little more wriggle room than the Bank of England and the Federal Reserve, as core inflation pressures are lower in the euro area,” said Goodbody chief economist Dermot O’Leary. “Inflation expectations are still slightly below its 2pc target also. That said, the inflation risks are rising and it is likely that the ECB will have to start raising rates in 2023.”
According to Bank of Ireland’s economic pulse, business and consumer sentiment went up in January as the Omicron scare wound down and restrictions eased.
The economic pulse came in at 84.5, up 4.6 on December and up 22.9 on a year ago, when the country was in full lockdown as a result of the spread of the Delta variant. It is still below its 2016 starting point of 100, but is “not far off pre-pandemic readings”, Dr O’Sullivan said.
“Households and firms were cautiously hopeful that the peak of the virus wave was nigh and that restrictions would be gradually eased through February.”
Consumer sentiment rose for the first time in January since last autumn, up 4.2 on December to 74.1.
Business sentiment went up 4.7 points to 87.1, on the back of an upbeat assessment in the retail, services and industry sectors, while construction firms were slightly downbeat compared to December.