The sharp jump in the August inflation rate points to a rapid erosion of our international economic competitiveness as our rapidly rising prices make Ireland one of the most expensive countries in Europe.
nnual inflation, as measured by the consumer price index (CPI), hit 2.8pc in August. This was up from 2.2pc in July. To get a feel for how quickly inflation has taken off, CPI was falling by 1.5pc as recently as October 2020. That’s a 4.3pc turnaround in the space of just 10 months.
Of course some of the upsurge in inflation is merely an unwinding of last year’s deflation. This is particularly true of energy prices. Between them motor fuel, electricity, gas and solid fuels account for about 7.5pc of the total CPI basket of goods and services.
Energy prices collapsed last year as the pandemic closed down most developed economies including our own. Gas and electricity prices fell by 7pc in the 12 months to October 2020 while the price of motor fuels dropped by 6.7pc over the same period. Between the jigs and reels this means that almost a third of last year’s deflation was due to lower energy prices.
This process has been reversed this year with electricity and gas prices increasing by almost 20pc in the year to August while motor fuel prices are up 13pc. Add it all up and higher energy costs contributed almost half of the rise in prices over the past 12 months.
So is this just a once-off and will inflation fall rapidly once dearer energy begins to drop out of the figures next year?
Maybe, maybe not.
While I won’t bore you with the details, the accuracy of CPI as a true measure of rising or falling prices has long been questioned. How does an annual CPI of even 2.8pc tally with rents that are 40pc above their pre-crash highs? For a couple paying a third or even a half of their monthly income on the rent or mortgage, a CPI of 2.8pc does not correspond to the reality of their lived experience.
There are also serious question marks about the CSO’s measurement of house prices and residential rents. According to the CSO, average national house prices rose by 6.9pc in the year to June while private rents were up 4.5pc in the 12 months to August.
Really. Property price website daft.ie estimates that average house prices were up 13pc in the 12 months to the end of June while rents rose by 5.6pc over the same period. I’m not qualified to judge on the competing CSO and daft.ie estimates but the daft.ie numbers are supported by a wealth of anecdotal evidence.
Who among us hasn’t heard horror stories of friends and relations having to pay extortionate amounts in either rent or mortgage for the privilege of a roof over their heads?
What is undeniable is that Ireland has once again become one of the most expensive countries to live in Europe with the latest figures showing that in 2020 prices in Ireland were second only to Denmark in the EU.
This feels like déjà vu all over again. Between 1996 and 2008 Ireland rose from ninth to second place in the EU consumer price league. The death of the Celtic Tiger saw Ireland drop down the rankings and by 2010 we had fallen to “only” fifth place.
Sadly, that was about as good as it got. We are back up to second place, and this was before any post-pandemic jump in prices. Even when they can return, how many foreign visitors will be happy to pay €6 or more for a pint in Dublin city centre?
The wide disparity between price rises as measured by CPI and asset, particularly house, prices is not unique to Ireland. However, we do seem to be a pretty extreme example. Even by the CSO’s own yardstick, house prices are now rising two-and-a-half times more quickly than CPI while if you go with daft.ie house price inflation it’s more like four-and-a-half times CPI.
If house prices, and rents, stay high then sooner or later they will feed through into the general price level. The transmission mechanism is the labour market. All of those people paying record rents will either seek higher wages from their existing employer or, failing that, move to a new one who pays more.
How quickly will higher Irish wages feed through into our export prices and will we be able to pass those higher prices on to overseas customers or will they switch their business to other suppliers?
This is the challenge now facing Ireland.
“The evidence is there, we are hearing it every day from our members,” says IBEC director of lobbying Fergal O’Brien. “There is a lag between rising business input costs and consumer prices”.
Even before we went into lockdown, the Irish economy faced a series of constraints: infrastructure, climate investment and, most critical of all, housing. As the economy re-opens these constraints, along with a major threat to our 12.5pc company tax rate, have all reappeared with a vengeance.
“You control what you can in terms of competitiveness. Our members are particularly concerned that these constraints are feeding into a tight labour market. We need to address skills shortages and housing. We will also probably need people from abroad again”.
While these new arrivals will ultimately allow us to build more new houses, the Catch-22 is that in the short-term they will probably further increase housing demand, further pushing up prices and undermining our competitiveness in the process.
“We are seeing the most significant decline in competitiveness in 15 or 16 years”, says O’Brien.