Growth in the economy this year will be "robust" and "unprecedented", according to the Economic and Social Research Institute.

In its latest quarterly economic commentary, the ESRI predicts the economy will grow by almost 14% this year and 7% next year.

Inflation, however, is expected to be higher peaking at 6% early next year.

The economy's recovery from Covid has already delivered strong growth this year.

The ESRI predicts this will carry through into next year with the domestic economy growing by just over 7%.

The recovery has boosted tax revenues which the ESRI believes will push the deficit in the public finances down to just under €10 billion this year and to €4.8 billion next year.

The institute warns, however, that higher inflation could erode the benefits to taxpayers and social welfare recipients from changes announced in the recent budget.

It now expects inflation to average around 4% next year, and to peak around 6% in March.

It believes many of the factors influencing inflation will be temporary but warns the future of international energy prices remains uncertain.

It also warns that escalating housing costs for both buyers and renters remain a threat to our competitiveness.

The ESRI says the labour market has also recovered better than expected with a swing from an average unemployment rate of 26% in the first quarter of this year to an average 7% in the final three months of 2021.

Next year, it expects unemployment to further decline to 5%.

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It recognises that risks remain, such as further health restrictions from Covid-19 variants and potential trade tension between the UK and EU.

It also points out that the most up-to-date data shows economic growth slackening off in November.

Its quarterly commentary also contains a segment on energy prices. It recommends that investment in LNG facilities and gas storage could help to smooth out short-term swings in demand and should be considered as a response to increasing gas prices.

The coalition's current Programme for Government explicitly rejected a plan for a LNG terminal in the Shannon Estuary.

Kieran McQuinn, Research Professor at the ESRI, said there is no doubt that a high rate of inflation is putting pressure on household incomes and that it will have an effect on overall economic growth.

However, he also said the last year has demonstrated that the Irish economy has been "quite flexible" in adapting to the pandemic and the different challenges.

"Even though we had very significant public health measures at the start of this year, we still have a very strong growth rate for the year as a whole," Professor McQuinn said.

Speaking on Morning Ireland, he said a number of factors, including energy price issues and the effects of the pandemic are contributing to the current high rate of inflation.

"International economies have struggled to match supply with the surge in demand that has been witnessed as restrictions have been eased, so that has led to difficulties in the supply chain," he added.

The ESRI predicts that inflation will continue into the first quarter of 2022 but then the pressures of supply chain issues might start to ease, as long as economies remain open and Professor McQuinn said they would expect the rate of inflation to taper off to 2% by the end of 2022.

But he cautioned that the higher rates of inflation are going to "eat into" household incomes.

He said while certain measures were introduced in the Budget which were sought to offset the impact, they were set around a certain rate of inflation that might have been lower than has transpired.

He also said the emergence of Omicron is a huge uncertainty heading into next year and that additional public health measures have had a negative impact on the economy and on investment.