For much of the last year, we've been bombarded with talk of inflation.

It all kicked off around this time last year as economies reopened following repeated coronavirus lockdowns and excess savings started to be unleashed.

As demand soared, economists warned of the potential for price rises across economies as supply chains slowly got back up and running.

There were also what they called 'base effects'.

As prices had plummeted during 2020, there was an inevitable uplift as demand returned and this led to talk of inflation being temporary or 'transitory'.

In other words, it would pass and although prices would end up perhaps being a bit higher, the inflationary environment would peter out.

And besides, we hadn't had much inflation in the last decade so a dose of it would do us no harm.

Radically changed environment

Russia's invasion of Ukraine altered the picture dramatically.

Oil and gas prices - which had already been driving much of the inflation in energy prices - soared even more.

Brent crude hit a 15 year high of close to $140 a barrel before pulling back but has settled comfortably at around $120 a barrel now.

The theory of inflation being transitory now appears to be well and truly debunked, although the chief economist of the European Central Bank, Philip Lane, said this weekend that he was confident that inflation would start to decline by year end and would come back to its 2% target range in the coming years.

Although talk of interest rate hikes in Europe had abated, some believe they are back on the agenda now after the ECB announced plans to pull back on its stimulus efforts earlier than expected.

The bank also downgraded its growth forecast for the coming year.

With no sign of Russia's war with Ukraine ending any time soon, talk has turned to the possibility of recession.

Together with inflation, that would precipitate what economists refer to as 'stagflation' - a particularly toxic mix of rising prices while economies are contracting.

The name is derived from its two main characteristics - simultaneous inflation and economic stagnation.

Generally, policymakers are unable to tackle one problem without making the other worse.

It's a scenario we haven't experienced in decades and one we'll be hoping to avoid at all costs now.

The disco era - when 'stagflation' was at its height

What are the chances of a return to stagflation now?

Not likely at all, the President of the European Central Bank believes.

Addressing a conference in Paris earlier in the week, Christine Lagarde said the worst case assessments didn't envisage a recession in the euro zone.

"Even in the bleakest scenario, with second-round effects, with a boycott of (Russian) gas and petrol and a worsening of the war that goes on for a long time - even in those scenarios we have 2.3% growth," Ms Lagarde said.

What's certain is that the central bank is walking a monetary tightrope.

Although maintaining price stability is its primary objective, it must do so without damaging economic activity.

However, the performance of the European economy is far from assured right now.

So shrouded is the global situation in uncertainty that the OECD last week said it was 'not in a position' to present its usual economic outlook.

It did present a simulation of some of the potential outcomes of war with up to 1.5 percentage points possibly being wiped off economic growth in the euro zone this year.

But some are worried that this under-estimates the true economic impact.

What about Ireland?

Economic growth in Ireland rebounded strongly in 2021 with gross domestic product expanding at a rate of over 13%.

There was a sharp drop in growth recorded in the final quarter of the year which may have been down to 'statistical noise' rather than anything significant.

However, it was the sharpest quarter-on-quarter decline on record and it led into a year that's bound to present some major economic challenges.

The Economic and Social Research Institute (ESRI) presented its updated outlook for 2022 during the week with growth in GDP terms cut from 7% to just above 6%.

A more accurate representation is Modified Domestic Demand which measures growth in the domestic economy and largely strips out the multinational effect which tends to distort our GDP figures.

The institute sees this measure expanding at a rate of 5% - down from just over 7% previously.

Much of that is down to the reduced spending power of consumers as they adapt to the rising cost of living.

In a monthly analysis of consumer sentiment, KBC Bank Ireland described the inflationary environment as representing a 'sea change' in circumstances for households following years of muted inflation.

"Quantifying such pressures is made very difficult by the exceptional volatility in commodity prices at present as this makes the precise rate of inflation likely to prevail through 2022 unusually uncertain," Austin Hughes, chief economist with KBC Bank Ireland said.

Assuming inflation averages out at 6% in 2022, he calculated that the step-up in price increases between last year and this year would drain around €4 billion from consumer spending power in 2022 alone.

That implies a hit to the average household of just over €2,000.

Inflation, which had been largely confined to energy prices, is spreading to other areas like food

Is recession on the horizon?

Although all current outlooks are presented with major caveats, Ireland should escape recession for this year at least.

"The resilience of the multinational sector and the adaptability of domestic businesses seen through the pandemic suggests Irish economic growth will slow rather than stop in 2022," Austin Hughes said.

Dermot O'Leary, chief economist with Goodbody agrees that the prospect of recession here is a long shot at this juncture.

"The closer you are to the conflict, the greater the impact. We're on the west of the continent. The second, more important factor is the speed of the economy coming into this crisis," he explained.

However, he said core domestic demand and disposable income - both very elevated prior to the invasion of Ukraine - would both undoubtedly take a hit.

When it comes to the euro zone, he said the odds on the bloc tipping into recession had shortened, but there were certain assumptions that had to be met.

"You would need to see a sustained period of oil prices at $150 a barrel, for six months or so. And that's a prospect. The next moves from the Europeans will be to push for increased sanctions. You could see energy prices spiking at $150 plus then," he explained.

Pressure on households and incomes

With inflation projected to peak at 8.5% by the summer, the ESRI sees the rate of price increases averaging out at just below 7% for the year.

While last year it was largely confined to energy prices, the inflationary surge has been spreading into other areas with food in particular primed for hefty increases as pressure on ingredients and processing costs intensify.

The hit to households will be multi-faceted.

For those fortunate enough to be able to command pay increases in excess of the rate of inflation, they should be able to absorb the price increases without taking a hit to their living standards.

However, on the basis of the revised inflationary forecasts, an employee would have to be receiving a pay rise of the order of close to 10% this year to achieve that.

Anything less than the rate of inflation would effectively see a household's spending power weakening.

Employers, who had pleaded restraint on the basis of inflation being transitory, will come under intense pressure from employees and their representatives.

"It will be very interesting to see what happens with with public sector wage negotiations in the summer," Stephen Kinsella, Professor of Economics at the University of Limerick said.

"Unions will come back and look for pay increases based on inflation running at 7 or 8%, for example, and they'll be looking for 8 to 10% over three years, which will vastly increase the public pay bill," he noted.

And if it's true for the public sector unions, it will also be true of the private sector, particularly in industries where there are huge constraints like tech, pharma and biotech.

For those on fixed incomes or in less competitive sectors where an employer is not willing to pay up to 10% over one or two years, workers will effectively be poorer in real terms, Stephen Kinsella points out.

"It's those outcomes you want to avoid because you will push people out of the market," he said.

"It might cause a recession if the monetary and fiscal policy is incorrect at the same time," he warned.

An election is not due for a number of years but cost of living is already emerging as an issue that's likely to dominate debate.

And that's on top of the underlying affordability problems already persisting in the economy in the areas of health, housing and childcare.

While they were largely pushed aside by Covid and now a war on the edge of Europe, they have not gone away and will likely have been exacerbated by recent developments.