The Government has to decide its priorities in the upcoming budget, as it can't protect everyone from the rising cost of living.
Economist Dr Barra Roantree was speaking as a new ESRI report revealed income inequality has risen despite a strong labour market recovery.
Household income adjusted for inflation fell between 2020 and 2021 for the poorest tenth of individuals, and stalled for most others in the bottom half of the distribution.
The ESRI said income inequality actually increased for the first time since 2017.
Lead author of the report Dr Barra Roantree told Newstalk Breakfast inflation is further exacerbating the problem.
"This sluggish growth was actually emerging even before we had the big increase in inflation," he said.
"That's likely to have further eroded incomes - we've seen inflation of more than 7% a year last year and probably going to be the same this year.
"For households, particularly at the bottom of the income distribution, they won't have seen any income growth in almost three years.
"So, that does mean that the Government faces a difficult challenge when it comes to the budget time."
'What are the priorities?'
Dr Roantree said the Government has to be more targeted going forward.
"It can't do enough to leave everyone better off, it can't protect everyone from the effects of inflation," he said.
"Doing so would break through their own fiscal rules, it wouldn't be particularly responsible from a macro-economic perspective.
"They do have to be more targeted in who they decide they want to support.
"Who they support is ultimately a matter for what groups they think are suffering most and what they want to support most.
"They really do need to set out what are the priorities."
'We're catching up'
Dr Roantree said Irish income inequality is still quite low.
"We're a bit below the European average," he said.
"The increase we've seen in this latest year is the first in a number of years; but really over the last 30 years we have remarkable progress in income inequality.
"We're one of the few advanced economies where you've seen income inequality decline, and decline in a sustained way.
"We talk a lot about [how] 'Incomes in Ireland grew a lot' - much of that is just that we're catching up with other European countries because we were so poor for so long.
"What's really quite unique about our experience is how inclusive that growth has been," he added.
The ESRI said the fall in household income at the bottom of the distribution is the result of "a decline in employment earnings despite a strong labour market recovery which saw 200,000 more people employed in 2021 than in 2020 following the easing of COVID restrictions".
It said this decline is driven by a reduction in hours worked per week and months of full-time work per year, suggesting the recovery in the labour market was not experienced equally by households.