Consumers are facing months of rising prices as the conflict in the Gulf squeezes oil supplies and fuels inflation, two heavyweight forecasters have warned.
The Economic and Social Research Institute (ESRI), an independent think tank, and the Central Bank both issued sharp warnings of inflationary pressures across the economy as higher oil prices begin to bite.
Their warnings come as Iran poured scorn on US claims that it was considering peace proposals, though Tehran stopped short of rejecting efforts out of hand. In Washington, the White House said that president Donald Trump favoured a peace deal but was also willing to “unleash hell” against Iran.
At home, Opposition parties were sharply critical of the Government’s package of measures announced earlier this week, claiming the relief from higher fuel prices did not go far enough.
Tánaiste Simon Harris said the Government could introduce further packages later in the year, acknowledging that the surplus expected in the public finances for the end of the year would now be smaller.
In its latest quarterly bulletin, the ESRI predicted headline inflation in the Irish economy will average 3.2 per cent this year, up from a previous forecast of 2.1 per cent, and remain elevated at 2.7 per cent next year.
A more prolonged conflict in the Middle East with an extended spike in energy costs could see “price rises across a wide range of goods and services” resulting in higher inflation and a dampening of economic activity.
Even if the conflict ends soon there will be a lasting impact on prices here, it said.
“Prolonged disruptions in the Strait of Hormuz would put considerable upward pressure on oil and gas prices, and raise uncertainty,” the ESRI said.
The think tank was critical of the Government measures, saying they represent a “subsidy to higher-income households”.
The Central Bank said headline inflation in the Irish economy could double to 4.2 per cent in the coming months if there is a prolonged conflict in the Middle East.
In its latest quarterly bulletin, the bank said the current spike in oil and gas prices would lead to lower growth and higher inflation and warned that lower-income households would be “disproportionately” impacted.
Airlines chiefs also warned the Oireachtas transport committee that holidaymakers could face higher air fares following the surge in oil prices sparked by the war.
Jet fuel prices have soared 50 per cent since the US and Israel struck Iran four weeks ago, according to Irishman Willie Walsh, chief executive of the International Air Transport Association.
Carriers in some regions are already passing on the extra cost to passengers, added Walsh, whose organisation represents 85 per cent of the world’s airlines.
The outlook in the Gulf looks deeply uncertain, with the US suggesting it is seeking a peace deal with Iran, while at the same time moving thousands of troops and equipment to the region.
“The president’s preference is always peace. There does not need to be any more death and destruction,” White House press secretary Karoline Leavitt told a press conference on Wednesday night.
“But if Iran fails to accept the reality of the current moment, if they fail to understand that they have been defeated militarily and will continue to be, president Trump will ensure they are hit harder than they have ever been hit before.”
Her comments came after Iran apparently rejected the US proposals for ending the war, responding with five conditions of its own, including a conclusion of the war on all fronts, payment of war damages and sovereignty over the Strait of Hormuz.