Will consumer prices continue to rise?
No sooner had the first Covid-19 vaccines been administered than discussions turned to the risk of price inflation accompanying an imminent recovery of global economies after the pandemic.
It all started in the United States, where new President Joe Biden was keen to launch a series of stimulus packages amounting to billions of dollars in spending over several years.
Warnings of a risk of overheating were initially dismissed, but soon alarm bells were sounded from inside the President’s Democratic Party with former Treasury Secretary Larry Summers warning that plans to stimulus could cause “inflationary pressures of a kind we haven’t seen in a generation.”
Very quickly, the rhetoric spread to this side of the Atlantic. Speaking to The Irish Times in March, TÃ¡naist Leo Varadkar warned that we are behind a period of price inflation here and that is something we should at least talk about.
A “transitory” phenomenon
In the months that followed, the inflation debate was largely confined to economists and market analysts.
The stock markets swung over whether the US central bank, the Federal Reserve, would try to control inflation by raising interest rates earlier than expected and whether it could start cutting the huge sums of money. cheap money that she injected into the financial system every month.
But the concept quickly moved from the realm of stock market speculation to reality. In May, it was found that consumer prices in the United States were increasing at an annual rate of more than 5% – well above the 2% that central banks aim to keep the inflation rate below.
In the euro zone, the rate of price increase reached and then exceeded this threshold of 2% (to reach 3% in August), but the European Central Bank was not worried, describing the inflationary trend as “transitory”, adding that it had more to do with the reopening of economies in the aftermath of the pandemic.
“There is almost no connection between all types of spikes related to the reopening of the economy and what is happening in the inflation trend,” said Philip Lane, chief economist of the ECB and former governor of the Central Bank of Ireland at an online event hosted by the Dublin-based Institute of International and European Affairs in May.
The regulator believes that in the longer term it will struggle to meet this 2% inflation target, so it is ready to let the current inflationary period run its course.
“Achieving the inflation target must be sustainable and not just be the result of short-lived forces that lead to one-off price increases which should not lead to ever higher inflation from year to year. “, wrote Mr. Lane in a blog. these last weeks.
Bitter price hike
In recent months, inflation has started to hit consumers and households in the pocket and especially in areas that would not be considered âdiscretionary spendingâ.
In July, figures from the Central Statistics Office captured consumer prices here, rising at an annual rate of 2.2% before climbing to 2.8% in August – the highest rate of inflation for a decade.
Most of the inflation over the past two months came from price increases in transportation, energy and housing – thus, the cost of a car, travel costs, price. housing and the costs of moving around a house.
And that last area is one that households are really going to notice in the coming months, as temperatures drop and the evenings get longer.
All the energy suppliers in the market, whether gas or electricity, have increased their prices, some two or even three or four times, in recent months.
And the individual increases have been quite dramatic – up to 26% in the case of an electricity supplier.
Daragh Cassidy, communications manager for the price comparison website bonkers.ie, said such price increases were unprecedented in the market.
âTaking the price increases together, you plan to add around â¬ 300 or more to the average annual household bill, so it’s not a trivial amount at all,â he said.
And that’s just one area of ââhousehold spending. Car prices rose 7% through August, and the cost of running a car rose, with gasoline prices rising 12.5% ââand diesel 13% higher than in August. same period a year ago.
Rental costs – a lingering inflationary scarecrow – rose 4.5% over the year, with most of the increase felt outside the capital, according to data from real estate website daft.ie.
This is an area where inflation is likely to persist given the lack of properties available for rental.
Rising food prices ahead
The pandemic has precipitated a massive slowdown in the flow of goods around the world.
Naturally, it would always take time for this movement in the supply chain to return to more standardized levels.
Shortages inevitably mean higher prices for goods that are in short supply.
Initially, this impacted areas such as construction, with the price of materials like wood, steel and aluminum rising sharply, but it is slowly spreading to other areas as well.
Again this week, the agri-food professional services group Ifac has warned of upcoming food price increases and it all stems from the higher costs that farmers and food businesses have encountered and then trickle down to consumers in various ways. shapes.
âFor food companies, it’s about packaging and ingredients. For agro-industries, steel and wood increase considerably and the costs are felt by the consumer or the farmer client, âexplained David Leydon, food and agri-food manager at Ifac.
“We expect higher food prices and higher prices for farmers in a whole range of regions,” he added.
The price of food and non-alcoholic beverages was an area where inflation was at a very low level in the latest CSO figures.
However, the price of food in restaurants, cafes, fast food outlets and take-out had risen by almost 3%, with further increases likely in the coming months.
If the ECB’s expectations materialize, consumer price inflation should start to moderate as next year approaches.
However, as Austin Hughes, chief economist at KBC Bank Ireland, points out, there is growing concern that the inflationary trend may reverse as quickly or as far as previously thought.
“A ‘noisy and nasty’ upward trend in consumer price inflation in Ireland is now well established and the short-term dynamics mean that the pressures are mounting and intensifying,” he said. underline.
The feeling of weakening “bang for the buck” among consumers could intensify, he warned.
“With higher heating costs weighing on purchasing power, a noticeable increase in the cost of living could become a more prominent feature of the economic climate in the months to come,” he said.
And that will likely translate into demands for higher wages, which may already materialize, as the CSO’s earnings figures seem to indicate.
Average weekly earnings grew nearly 4% in the second three months of this year, the data showed, though the numbers have been complicated by Covid-related changes in the workforce and their earnings.
Also, it should be noted that these numbers are averages and that there are workers in many industries who will not be able to earn higher wages and they will have to smile and bear the price increases that erode the market. worth their hard-earned euros.
Those dependent on social assistance benefits are particularly vulnerable to increases in the cost of living, especially in areas where cuts are not an option, such as the cost of running a house and traveling.
As the Social Justice Ireland group pointed out in its pre-budget submission this week, basic social assistance rates have not been increased in the last two budgets.
In addition to dealing with a host of pandemic-related issues, inflation is another factor that finance and expenditure ministers may now need to consider when developing next month’s budget.