The Central Bank is likely 'wrong' to caution that higher public spending will fuel inflation, a leading economist has said. 

Ahead of next month’s budget, the bank has warned that too much spending could “amplify demand in an economy already operating at capacity, and risks leading to inflation being higher in Ireland for longer than would otherwise be the case.”

Speaking to Newstalk Breakfast, economist Austin Hughes described the intervention as “an old song, just being repeated” and said there are other things the Government should be more concerned about. 

“The Central Bank always warns at this time of year that the Government is driving us on the road to Hell in terms of the public finances,” he said. 

“It’s understandable; there are risks in this regard but I don’t see them as the key risks really facing the economy at the moment.” 

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Inflation in Ireland peaked at 8.1% last year, following the West’s decision to impose sanctions on Russia following its invasion of Ukraine. 

Energy and food costs soared around the world as supply chains were disrupted - something Ireland was not immune to. 

“The real story is that the inflation problem we’re facing now isn’t one where we’re facing too much demand in the economy, it’s one where there are problems around supply of food, energy and also structural issues around supply chains globally,” Mr Hughes said. 

“[As well as] some issues around supply in areas like the hotel sector domestically. 

“They’re not areas that are coming from excess demand.” 

The European Central Bank (ECB) is seen in Frankfurt, Germany in July 2017. Picture by: Noppasin Wongchum / Alamy Stock Photo

Mr Hughes said while he believes the Central Bank "could be wrong", it was hard to say "definitively" because of the unpredictable nature of inflation; however, he believes more Government spending in certain areas could reduce inflation and increase growth in the longer-term. 

“People are taking a real hit and the Government is providing some shelter through the various measures,” he said. 

“I think if fiscal policy is enlightened here and actually deals with costs in the economy, helps to get transport costs down through improving infrastructure, helps to get housing costs down by building more houses in the future and helps to get childcare costs down by various other measures there, I think we will have lower inflation and stronger growth over the next while.” 

The European Commission forecasts inflation will fall to 2.4% next year - slightly below the European Central Bank’s 2% target. 

Main image: Euro bank notes. Picture by: Alice Dias Didszoleit / Alamy Stock Photo