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Ireland’s rate of inflation dropped to 2.7% y/y in January from 2.8% y/y in December. That’s because falling fuel prices outweighed the strength in services inflation. However, underlying inflationary pressures are likely to persist. A tight labour market, strong domestic demand and infrastructure bottlenecks all put upward pressure on domestically generated inflation.
Fuel prices help cut Ireland’s headline inflation rate
The main source of downward pressure on Ireland’s inflation rate came from pump prices. Transport fuel inflation fell to -2.3% y/y from 1.2% y/y in December. Unfortunately, we suspect this will reverse in the coming months. That’s because oil priced in euros has risen by around 17% since the start of 2026.
Food inflation also fell to 3.9% y/y in January from 4.1% y/y in December. Stripping these factors out, core inflation actually rose to 2.8% y/y from 2.7% y/y, mainly due to services inflation nudging up. What’s more, strong domestic price pressures mean services inflation is unlikely to fall much further in the coming months.
The big picture is we still expect Ireland’s inflation to ease a little further from here as a stronger euro continues to weigh on most import prices, but domestic inflationary pressures will remain elevated.
Ireland’s 2026 inflation outlook: pressures more persistent
Looking ahead, we see services inflation – the measure most reflective of domestically generated inflation – staying above 3% throughout this year. That will prevent a more significant drop in overall inflation in the coming months.
Adding to this outlook is this morning’s labour market data. This showed the unemployment rate ticking back down and employment growing 2% y/y. While the labour market clearly loosened across 2025, we think employment growth will be a little under 2% this year. This will support wage growth and ensure the jobs market remains a source of inflationary pressure.
Interest rates will also likely compound the strength of the domestic economy. At 2%, we doubt the European Central Bank’s rates are restrictive enough to weigh on activity for an economy as strong as Ireland’s.
Rounding out this picture is that the medium-term risks remain firmly to the upside. Big increases in day-to-day public spending, as well as potential bottlenecks in housing supply and infrastructure, risk adding to price pressures.
Admittedly, there’s a chance US tariffs cause a more significant slowdown in Ireland than we currently expect. While trade is excluded from Modified Domestic Demand, which removes the distortionary impact of multinationals, a slowdown in hiring by large employers could spill over into the domestic economy.
Overall, today’s data suggests that, despite headline inflation easing in January, underlying measures of domestic inflation may not fall much further.
For now, our base case is for headline inflation to ease a little further. However, the risks are firmly to the upside. That’s because the labour market is still relatively tight and the effect of a stronger euro will fade as the year progresses.
