The Governor of the Central Bank has said that fast-rising labour costs will become the main driver of core inflation, as the effects of past energy price shocks and other pressures begin to fade.
In a speech this afternoon at University College Cork, Gabriel Makhlouf predicted that the increase in the rate of inflation will continue to slow over the next two years, with the Irish economy shifting to a slower growth path too.
Mr Makhlouf has spent the last 24 hours in Midleton, Kinsale and Cork city, talking to business and community leaders about how the economy is having an impact on their daily lives.
The Central Bank Governor chose UCC for his first speech of 2024.
The speech dealt mainly with the long-term outlook for the Irish economy over the next 50 years.
However, Mr Makhlouf also referred to the economy's short-term challenges.
He said Ireland had dealt with a succession of large, negative shocks including, since 2020 alone, the Covid-19 pandemic and the surge in inflation that followed Russia's invasion of Ukraine.
He said the country's economy had been shown to be resilient over those years, and he predicted that different pressures will become evident between now and 2027.
"The Irish economy has shifted onto a slower growth path in line with its current medium-term potential," Mr Makhlouf said.
He also predicted that the inflation rate would ease, if current interest rates are maintained for a sufficiently long duration.
"As the momentum of domestic economic activity ebbs, and the effects of tighter monetary policy both at home and abroad continue to materialise, the process of disinflation is expected to proceed at a more gradual pace over the next two years," he said.
He said that while the short-term outlook points to stagnation, he expected the economy here to gradually return to growth over the medium term, with different pressures coming to the fore.
"A broad-based disinflationary process is unfolding and is expected to continue during 2024 as the effects of past energy price shocks and other pressures fade.
"The pace of growth in labour costs will then be the dominant driver of core inflation," he said.
Mr Makhlouf distinguished between core and headline inflation.
Headline inflation is measured by the consumer price index.
Core inflation strips out changes in food and energy costs from headline inflation.
With food and energy excluded, changes in labour costs therefore form a greater component of core inflation.
He stressed that headline inflation is falling and said he is confident that headline inflation will hit its target rate of two per cent in the medium term.
He said the next 50 years would see challenges such as demographic change and ageing, climate change, digitalisation and global trade fragmentation.
"Addressing multiple challenges will involve difficult choices, but planning well will help with choosing the right route and support sustainable improvements in living standards for the whole community," he said.
