Energy and commodity prices will remain much higher for longer, Ibec expects, even if growth in inflation – currently running at a 22 year high of 6.7% – slows down.
It warns that any “premature or misjudged” monetary policy reactions to the inflationary environment could trigger an unnecessary economic contraction.
“This coming year will be a tight balancing act for policymakers globally,” the report warns, adding that measures to support households and businesses must be “tightly targeted” to avoid further stoking inflation.
“Ibec is calling on Government to intensify work through the Labour Employer Economic Forum to ensure better coordination and targeting of tax, social welfare and other labour market policies that can address inflationary pressures,” Gerard Brady, Chief Economist and Head of National Policy with Ibec said.Overall consumer trends in the opening months of the year captured the strong momentum underlying the economy with retail sales volumes in the first two months up 12% on the same period in 2019.
But Ibec warns that the global environment will drag on growth this year and next, with rising energy costs, record commodity and transport costs and global supply chain challenges resulting in a slowing of business investment and lower than previously expected consumer spending.
“Rising energy prices will introduce a relative price shock to consumer spending,” Mr Brady said.
“This is where households when faced with higher spending on energy bills, cut back on consumption elsewhere. Overall consumption remains unchanged but other sectors of the economy – particularly those reliant on discretionary spending – lose out,” he added.