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Inflation nudged up in April driven by higher energy costs, despite weaker services inflation. The good news is that government cuts to excise duty are now flowing through to retail prices so inflation should ease a little in May despite rebounding services inflation. For 2026 as a whole, inflation is likely to average 3.4% this year, which will weigh on real incomes. However, the Irish economy is in a far stronger position than the rest of Europe, which means real growth will continue, albeit at a weaker pace than recent years.
Inflation nudges up in April
Inflation edged up to 3.7% in April from 3.6% previously, the highest since January 2024. The rise in inflation was driven by another jump in fuel price inflation, which rose to 16.9% from 10.6% as the government’s cuts to excise duty had not yet flowed through to pump prices by mid-April when the CSO sampled fuel prices.
The good news is that weekly data from the European Commission shows that diesel prices eased to €1.97 last week from an average of €2.15 in April. Heating oil and unleaded prices have also fallen which will all help to keep a lid on inflation in the coming months, as the full effect of excise duty cuts are yet to feed through to consumers. That said, the Strait of Hormuz remains closed, and the longer restrictions remain, the higher oil and gas prices are likely to surge, potentially offsetting cuts to excise duty.
What’s more, the war in Iran is also pushing up inflation through mortgage rates with mortgage interest inflation jumping to 6.8% from 5.1%, the highest since late 2024 when the ECB had only just started cutting rates. That is likely to rise further as the ECB hikes rates in response to the energy shock over the coming months.
That said, services inflation eased to 3.2% in April from 3.5% despite rising mortgage costs, but this was largely driven by volatile factors such as a collapse in airfares inflation to -18.4% from -6.9% and package holidays easing to 1.0% from 14%. Both reflect the unwinding of an early Easter, which boosted prices in March and should rebound in May. Indeed, surging jet fuel costs are likely to leave airfares trending up this year, which will add to inflationary pressures from rising energy prices.
All told, April’s inflation data continues to show energy prices pushing up the headline, but underlying price pressures are sticky too as the labour market remains robust, which will keep domestically generated inflation elevated throughout this year.
Elevated inflation will slow, but won’t stop growth
Beyond May, we expect inflation to average 3.4% this year on current energy prices, with government energy support helping to keep inflation from surging to 4.0%. However, the risks are clearly to the upside as a prolonged closure of the Strait would put more pressure on energy prices, but also on food inflation through higher fertiliser and packaging prices.
Indeed, if energy prices put more upward pressure on inflation, then market rates will rise further as investors price in more aggressive hikes from the ECB. While the impact of higher mortgage interest rates would feed in gradually due to fixed-term mortgages, this would push up CPI inflation and drag on disposable incomes for those refinancing.
The silver lining is that if energy and other commodity prices rise sharply, then the government still has plenty of fiscal space to extend existing support and build upon them to support households and businesses. What’s more, the labour market remains robust, which will support wage growth and help the domestic economy to keep growing despite elevated inflation. That said, a stronger labour market than the rest of Europe means some second-round effects through stronger wage growth are likely to keep inflation elevated in 2027.
The bottom line is that the Irish economy is entering the crisis in a much stronger position than the UK and other European economies, which should keep growth ticking along even as energy prices eat into real incomes and the ECB hikes land in the coming months. We continue to expect inflation to average around 3.4% this year, but for Modified Domestic Demand to grow 2.5% even as inflation weighs on real income growth and higher interest rates dampen activity.
