Iran War: Inflation to Hit 3.2% & Slow Irish Economic Growth – ESRI Forecast

Irish Inflation Set to Rise as Iran Conflict Impacts Energy Prices

Ireland’s inflation rate is projected to climb to an average of 3.2% in 2026, up from 2.2% in 2025, driven by escalating energy prices stemming from the ongoing conflict in Iran, according to a new forecast from the Economic and Social Research Institute (ESRI). The ESRI warns that a prolonged conflict in the Middle East will lead to price increases across a broad spectrum of goods and services, potentially dampening economic activity.

The revised inflation forecast comes as the Irish economy experiences a slowdown in growth, with projections indicating a 2.1% expansion this year, a significant drop from the 4.9% growth recorded in 2025. The ESRI’s analysis highlights the vulnerability of the Irish economy to external shocks, particularly those impacting global energy markets.

While the government recently implemented cuts to energy taxes, the ESRI has cautioned that these measures are not effectively targeted towards those most in need. ESRI research professor Alan Barrett explained that untargeted tax reductions disproportionately benefit wealthier households due to their higher consumption patterns – “bigger cars and bigger houses,” as he put it. Past research indicates that 50% of the cost of such untargeted measures accrues to the top 40% of households by income. Barrett emphasized that directing financial assistance to higher-income earners diminishes the capacity to support those at the bottom of the income scale.

Construction Sector Faces Additional Headwinds

Beyond the broader inflationary pressures, the ESRI also flagged concerns about the impact of the Iran conflict on the construction sector. Construction inflation, exacerbated by the geopolitical instability, could hinder the delivery of new homes at a time when Ireland is already facing a significant housing shortage. The government has set a target of building 300,000 homes between 2025 and 2030, but the ESRI expressed skepticism about achieving this goal, stating it is “difficult to see further upward momentum in housing output.”

Current projections estimate 37,400 homes will be completed in 2026, with a slight increase to approximately 38,000 in 2027. However, the ESRI notes that annual completions need to approach 50,000 units to meet national housing targets. The organization also raised concerns about the economy’s capacity to manage numerous infrastructure projects within a limited timeframe, suggesting the government needs to prioritize investments, particularly in light of potential construction cost increases.

The ESRI’s report underscores the complex interplay between global events, domestic economic conditions, and government policy. The conflict in Iran is not merely an energy price issue; it has cascading effects on inflation, economic growth, and the ability to address critical challenges like the housing crisis. The effectiveness of government interventions, such as energy tax cuts, is also brought into question, highlighting the need for more targeted support mechanisms.

Looking ahead, monitoring the duration and intensity of the conflict in Iran will be crucial. Further escalation could lead to even more substantial increases in energy prices and broader inflationary pressures. The ESRI’s warning serves as a reminder of the fragility of the economic recovery and the importance of proactive policy responses to mitigate the impact of external shocks. The ability of the Irish construction sector to overcome inflationary pressures and deliver on housing targets will also be a key area to watch in the coming months.