Irish central bank hikes core inflation forecasts

DUBLIN (Reuters) - Ireland's central bank hiked its 2023 core inflation forecast to 4.9% from 3.5% three months ago and expects the measure that is seen as a better gauge of the underlying price trend to slow gradually once it peaks later this year.

While Irish inflation, as measured by the Harmonised Index of Consumer Prices (HICP), has almost halved in the last year to 5.4%, core inflation hit 5.7% in May, surpassing the headline rate for the first time since prices began to rise sharply.

The central bank also increased its forecast for HICP this year to 5.3% from 5% and sees the headline rate falling to 2.5% in 2025, when core inflation, which excludes unprocessed food and energy prices, would still be running higher at 2.7%.

The bank said uncertainty relating to its forecasts had diminished over the last three months and the risks to its inflation projections are marginally to the upside.

However with the economy growing strongly and also at full capacity due to a record low unemployment rate of 3.8%, the trajectory of core inflation hinges on firms' ability to absorb wage increases the bank sees averaging 6.2% this year and 5.9% in 2024, without unduly increasing prices.

The balance extends to the government whom the central bank said risked "significantly" adding to inflation in the coming years if it breaks its own expenditure rule and increases government spending by more than 5% year-on-year.

Ministers budgeted for an increase in spending of more than 6% this year to fund measures intended to ease the burden of higher inflation on consumers and have indicated they may breach the spending rule again in October's budget for 2024.

The government has also said on top of this it intends to increase the level of capital spending for the rest of the decade.

(Reporting by Padraic Halpin; Editing by Chris Reese)