The Central Bank has revised down its forecast for economic growth this year and pushed up its inflation projections, predicting that a reduction in real incomes will weigh on spending in the coming quarters.
The Bank still expects modified domestic demand, its preferred measure of the health of the economy, to grow by 4.8 per cent this year on the back of strong momentum late last year and in the early months of 2022 after the lifting of Covid-19 curbs.
However, it had expected much more rapid growth of 7.1 per cent just three months ago.
Inflation has continued to climb in the Republic and hit an estimated 22-year high of 6.9 per cent last month, according to Eurostat.
The Bank expects the State's harmonised index of consumer prices (HICP) to average 6.5 per cent this year, up from its previous forecast of 4.5 per cent and more than twice the 2.9 per cent rate it expected six months ago.
It sees inflation slowing to 2.8 per cent in 2023 and 2.1 per cent in 2024, forecasts based on financial market expectations of an energy price decline in the second half of 2022 that are also "highly dependent" on the fallout from the war in Ukraine.
A tightening labour market is already leading to stronger and broader-based wage growth, the bank said, saying this was a welcome development provided wages do not respond entirely to inflation and embed more harmful price hikes.
Higher energy and materials costs for businesses, together with supply chain disruptions, will also lead to a slowdown in modified investment growth to 4 per cent this year from the 2021 Covid-19 bounceback of 9.7 per cent before returning to 6.9 per cent in 2023.
Higher costs and labour shortages will also further hamper plans to tackle a housing affordability crisis, with the Central Bank predicting 3,500 fewer homes than previously forecast will be built over the next three years.
Housing completions should rise to 33,000 in 2024 from 24,500 this year, it said, putting the Government further behind in its target to average 33,000 a year over the next decade.
However, the Bank sees the budget deficit narrowing at a faster than expected rate to 0.8 per cent of gross national income this year, leaving the public finances "well positioned" to help poorer households deal with the inflation shock and address the needs of thousands of Ukrainian refugees arriving every week.
