The phased withdrawal of recent cuts in fuel duty - adding 10c to a litre of petrol and diesel - means inflation will be higher next year than previously forecast, Bank of Ireland has warned.
Inflation is now expected to average 3.1% this year, down from 3.3% and based on a lower oil price of $86 per barrel. Currently, pump prices are €1.70 a litre - their lowest level for five years.
Conall MacCoille, BoI's chief economist, said after the release of the bank's latest economic forecast yesterday: 'While we have revised down our forecast for CPI [Consumer Price Index] inflation to 3.1% in 2026, due to the fall in oil prices, we have revised up our projection for 2027 to 2.7% (from 2.6%).
'This may seem surprising. Part of the explanation is the phased withdrawal of Government excise duty cuts on petrol.'
The bank said: 'The withdrawal of Government supports for petrol/diesel means CPI inflation will fall slowly to 2.7% next year.' Temporary cuts were due to expire at the end of this month but have been extended until August 31 with a phased restoration to pre-reduction levels between September and year's end.
The economic slowdown from a surge in pharma exports last year - to beat US president Donald Trump's 15% tariff - will lead to a 3% contraction in GDP 'reflecting an expected 6.5% contraction in the multinational sector this year', BoI said.
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'This reflects the surge in 2025, ahead of feared tariffs, now unwinding,' the bank said. But the domestic economy should see a 2.5% expansion and a 3.5% rise in modified domestic demand is forecast, as 'healthy gains in consumption (2%), Government spending (4%) and investment (6.4%) will support the domestic economy in 2026', it added.
Mr MacCoille said supports meant pump prices in July, at almost €1.70 a litre, 'were close to the lowest levels recorded over the past five years'.
He added that 'consumer spending has remained resilient'.
*This article was originally published on BusinessPlus.ie.