Wage increases could fuel further inflation but experts not concerned just yet

Irish energy costs are already rising higher and faster than the rest of the single-currency zone. They are up 46.2pc compared to last May, according to the Central Statistics Office (CSO).

Other details on Irish prices won’t be available until the CSO publishes the consumer price index next week but, judging by the eurozone averages – which saw food prices increase by 7.5pc, industrial goods go up by 4.2pc and services go up by 3.5pc – inflation is likely to be widespread.

“We have runaway inflation in energy. We now have rapid inflation in food prices. And we have slightly more sneaky inflation in other areas,” said KBC Ireland chief economist Austin Hughes. “It will go high and it’s almost in the lap of the gods whether it’s above or below 9pc. It is a storm, it will be bumpy and there will be more problems.”

The Economic and Social Research Institute (ESRI) has predicted inflation will peak at 8.5pc this summer and average out at 6.7pc for the year. It is “unlikely that will be revised down”, said ESRI research professor Kieran McQuinn.

“It’s going to be very high this year,” he said. “All sectors are now beginning to experience it. It’s not just in your heating bill in your house, it’s in the factories and shops. It means that this is likely to be more persistent in nature.”

Petrol and diesel have already reached a record €2-a-litre in many forecourts, adding €500 to the cost of running a typical car since last year, despite the cut in fuel duty.

Grocery price inflation has hit 5.5pc, according to research group Kantar, which represents a near-10-year high. The upshot is shoppers seeking cheaper alternatives or cutting back on spending.

Airfares almost doubled in the year to April after pandemic restrictions were lifted. House prices were up more than 15pc in the year to March, while rents were up 12pc.

Price rises in other euro-using countries are even more severe. Double-digit inflation has taken hold in Estonia (20.1pc), Lithuania (18.5pc), Latvia (16.5pc), Slovakia (11.8pc), Greece (10.7pc) and the Netherlands (10.2pc). Prices in Belgium rose 9.9pc in May, while French, German and Spanish inflation are at all-time highs.

It puts governments and European central bankers under more pressure than ever to cool the economic jets.

The European Central Bank has hinted it will begin raising rates gradually in July, by around a quarter of a percentage point, which was unlikely to “do much” to cool down runaway inflation, said Mr Hughes of KBC Ireland. But it will hit homeowners in the pocket.

Meanwhile, Finance Minister Paschal Donohoe told RTÉ radio yesterday that he “can’t meet every other demand that has been placed upon me when we get to Budget day”.

The Irish Fiscal Advisory Council said this week that linking wages and pensions to inflation would cost €2bn this year – which the State can afford – but would have to be paid for by tax rises or other spending cuts in the years to come.

Private-sector workers are already demanding higher wages to cope with rising costs, with Tesco this week announcing a 10pc pay increase for Irish staff over three years. Sectors that were not in lockdown last year saw average weekly earnings rise 5.9pc in the first three months of the year, with financial, insurance and real estate pay up 22.7pc, the CSO said this week.

While too-high wages could fuel extra spending – and even higher inflation – economists are not yet worried about overheating, with Mr Hughes saying the Government has room to help reduce the “chronic problems in health, housing and childcare”.