Rising energy prices linked to the war in Iran are expected to push inflation in Ireland to an average of 3.2% in 2026, up from 2.2% in 2025, according to a new forecast from the Economic and Social Research Institute (ESRI). The institute warned that a prolonged conflict in the Middle East could trigger widespread price increases across goods and services, putting further pressure on household budgets.
The ESRI said higher energy costs would weigh on economic activity, slowing domestic growth to 2.1% this year, down sharply from 4.9% last year. The institute noted that sectors sensitive to energy prices, including manufacturing and transport, would be particularly affected.
The forecast also examined recent government measures to reduce energy costs. While excise cuts on fuel were broadly applied, the ESRI said these untargeted measures mostly benefit wealthier households with larger homes and vehicles. The extension of the fuel allowance, on the other hand, is aimed at lower-income households, helping those most in need.
“Greater gains from untargeted measures generally go to more wealthy households,” said ESRI research professor Alan Barrett. He added that past research showed around half of the benefits of untargeted policies are captured by the top 40% of households by income. “If you start having policies that direct money to higher-income people, it reduces your capacity to insulate those on the bottom,” Barrett said.
Housing output is another area of concern, with the ESRI projecting 37,400 homes will be built in 2026, rising slightly to around 38,000 in 2027. The institute noted that annual completions need to approach 50,000 units to meet national housing targets. The government has set a target of constructing 300,000 homes between 2025 and 2030, but the ESRI said achieving that goal is challenging. Rising construction costs, exacerbated by the Iran war, could further hamper building activity.
The institute also highlighted the strain on the economy’s capacity to meet multiple infrastructure demands in a short period. “It is difficult to see further upward momentum in housing output,” the ESRI said, adding that prioritisation will be essential if construction inflation persists.
Overall, the ESRI cautioned that higher energy prices and construction costs could combine to slow growth, reduce housing supply, and limit the effectiveness of untargeted fiscal measures, creating pressure on both households and policymakers.
The report underscores the economic risks posed by global geopolitical tensions, particularly in energy markets, and signals the need for targeted policies to protect vulnerable populations while supporting growth and infrastructure development.
