CONFLICT IN THE Middle East has led to a revised inflation forecast, with the Economic and Social Research Institute (ESRI) warning that other inflationary pressures could impact the delivery of housing. 

In a revised estimate, the ESRI is predicting a 3.2% inflation rate for 2026, and 2.7% in 2027.

Inflation in Ireland was measured at a rate 2.7% in the 12 months to February 2026, according to the Consumer Price Index (CPI).

The projected inflation rate topping 3% for this year is significantly above the target level of 2%, as recommended by the European Central Bank.

Energy price spikes, exacerbated by the war in Iran, are the main driver in the upwards forecast.

It has been flagged by experts that if the cost of oil continues to rise it will have a knock-on effect on foodstuffs and other imports, as happened during the beginning of the Russian invasion of Ukraine. 

While the outcome or duration of the conflict in the Middle East remains volatile and impossible to predict, other much-flagged risks remain in place.

Namely, these include our reliance on corporation tax, budgetary overruns, the ongoing challenge of lacking infrastructure – particularly housing – and the imbalance in productively and performance between foreign-owned and domestic firms.

The ESRI noted policy changes regarding housing designed to promote activity but said that, as yet, when examining data such as housing starts and planning permissions, this does not seem to have seeped through.

It said for national targets to be met, it is “well understood” that annual completions need to be approaching 50,000. It said an increase in output was registered in 2025 with 36,248 completions, compared to just over 30,000 in 2024.

“We expect 37,400 units to be completed in 2026, rising to approximately 38,000 in 2027. Furthermore, if recent energy price spikes feed through to construction inflation, this is likely to put downward pressure on production,” it said. 

Economic activity

The ESRI notes in its quarterly economic commentary for spring 2026, released today, that the previous strong performance in the Irish economy at the end of last year has been offset by this energy cost increase.

“This has considerably lowered the global outlook and risks a return of sustained inflationary pressures in Ireland and abroad,” it said in a statement accompanying its full report.

Despite its projections, it said: “However, the magnitude of any impacts is dependent on the scale and duration of the crisis.”

Modified Domestic Demand (MDD), a metric used by the Central Statistics Office to more accurately assess Ireland’s domestic economic activity by excluding more volatile multinational activity, grew strongly across 2025. This was propelled by increased household spending and a rebound in investment.

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MDD is still expected to grow in 2026 and 2027 despite inflationary challenges, the ESRI said. The measure is expected to grow by 2.1% this year and 2.8% in 2027.

The ESRI said a low unemployment rate will likely continue to support household expenditure. 

One of the report’s authors, the ESRI’s Alan Barrett, said the commentary was prepared against the background of the Middle East crisis.

“At this point, we cannot know what the full economic impact will be, but we are already witnessing significant energy price increases,” he said. 

“Based on previous ESRI research conducted during the last energy crisis, we argue that measures should be targeted at those most in need to ensure maximum effectiveness in the use of public money.”

Co-author Conor O’Toole of the ESRI said dealing with preexisting long-term challenges, such as corporation tax vulnerabilities, will be “made more difficult if inflationary pressures increase in an already-constrained economy”.