Inflation will soon hit levels not seen since the mid-1980s, as the economy battles a range of international challenges.

The latest report from the Economic and Social Research Institute (ESRI) warns that inflation could peak at 8.5% this summer before averaging out at 6.7% for the year.

The annual rate would be the highest seen since 1984.

Meanwhile, inflation is forecast to run at 5% in 2023.

The report notes that Ireland’s economy experienced a “robust recovery” last year as COVID restrictions were eased, consumer demand recovered and export activity held strong.

However, inflationary pressures, which had already been mounting due to supply chain problems and the rapid recovery in consumption will now continue to surge due to the Russian invasion of Ukraine.

ESRI report author Conor O’Toole said: “The Irish economy entered 2022 showing all the signs of a robust recovery from the pandemic; however, the fast changing global economic and geopolitical context points towards a worsening economic outlook with numerous headwinds.”

The ESRI said higher prices and greater uncertainty in global trade mean growth in the economy will be lower than previously forecast.

It now believes the economy will grow by 6.2% this year.

The report notes that further improvements in the unemployment rate are still likely this year – with unemployment set to average at 6.3% in 2022 and 4.8% in 2023.

It said a rate of 4.5% is expected by the end of next year.

Despite all the economic pressures the ESRI believes there will be a small surplus in the public finances this year for the first time in three years – due to lower than targeted spending and a strong underlying growth in taxation receipts.