Sign in. It’s quick, free and it’s up to you.
An account is an optional way to support the work we do. Find out more.
IN MID-FEBRUARY, I wrote here that inflation was widely expected to peak in the early months of the year “before falling back over the following 18 months or so towards the levels around 2% that we had become accustomed to.”
Highlighting geopolitical threats, I did note that “risks appear to be skewed towards inflation staying higher for longer than is currently anticipated.”
The game changed when Vladimir Putin invaded Ukraine on 24 February. Oil prices initially surged by about 50% while gas prices nearly tripled. Although both have come off their March highs, they remain much higher than pre-war prices.
External factors
Ominously, there is a growing consensus the war in Ukraine will be prolonged, and further speculation that Putin could shut off European gas this winter. Meanwhile, international food prices have hit historic highs, even before the impact of Russia’s Black Sea blockade fully feeds through to grain markets. High prices and scarce supply of food and energy will likely get worse before they get better.
Irish consumer prices kept accelerating through May, annual inflation reaching 7.8%. We’ve yet to see what figure the Central Statistics Office gives us for June by the end of the month, but on Friday, the EU statistical agency Eurostat put Ireland’s annual inflation rate at 9.6%, a percentage point higher than the Euro area average of 8.6%. A combination of momentum in prices and the subdued monthly inflation seen in June and July 2021 suggest the annual rate hasn’t peaked yet.
Surging inflation is a global phenomenon, and it has everywhere come to dominate political debate around domestic issues. Whether inadvertently or more cynically, this debate has been characterised by much pedalling of myths. So, let’s knock some of those on the head:
Myth 1: We’re going back to the 1970s
Some lazy parallels have been drawn with the last period of sustained and synchronised inflation. Prices accelerated in Western countries in the late 1960s, spiked higher after the twin oil crises of 1973 and 1979, coming back down only during the recessions of the early 1980s.
But, our economies are very different today compared to 50 years ago. For better or worse: we are far less dependent on oil, we have more flexible labour and product markets, we have credible and independent central banks, and – most importantly – long-term expectations of higher inflation have not become entrenched.
Myth 2: Wages are driving inflation
Again harking back to the spectre of the 1970s, there has been much weeping and gnashing of teeth over the so-called ‘wage-price spiral’, where wages chase prices higher, feeding through to ever-higher prices in a vicious circle.
But, there is absolutely no evidence that wages are a source of recent inflation. Up to March of this year, hourly earnings increased at an annual rate of only 1.9%, and only 0.4% in the public sector, far below the inflation rate.
Wages actually fell in the construction and hospitality sectors. This means most workers are suffering real-term pay cuts this year. Far from wages driving price increases, it is inflation that is rightly leading workers and their trade unions to demand pay hikes.
Myth 3: Governments can’t control prices
While this may be true in aggregate in a market economy, the government does have direct pricing power when it comes to fixed fees and charges on public services, such as passport renewal or bus and train fares at semi states.
And, to be fair, the government should be commended for reducing the cost of public transport earlier this year. The introduction of rent pressure zones, where rent can’t exceed inflation, and minimum pricing on alcohol shows the government is also willing and able to use its regulatory powers to control prices in supposedly competitive markets to achieve public policy objectives. Unfortunately, the latter intervention will have added to our inflation woes, with beer and spirits both registering double-digit price increases in the year to May.
Government also controls indirect tax rates, such as VAT and excise, which account for an important share of the price of most goods and services. If the government presses ahead with a further €7.50 carbon tax increase in the budget, as previously committed, this will further add to inflation.
There is a strong argument for a ‘price trigger’ – such as $100 per barrel of oil (Brent) and €100 per MW/h of gas (Dutch TTF) – above which the carbon tax increase would be postponed. If the point of the carbon tax is to discourage the use of hydrocarbons by raising the price, then there is no need to add fuel to the flames at a time when families are already struggling.
Myth 4: Mitigating measures make things worse
There is an argument that tax cuts or spending increases aimed at easing the burden of inflation will only add to the problem. It is true that increasing the budget deficit or reducing the surplus, can have an inflationary impact at the margin. But, firstly, current inflation is largely caused by external factors rather than by domestic demand, so this is less of a concern.
Secondly, if it were a concern, there is no reason why compensatory measures couldn’t be introduced to ensure neutral effects on the budget and on inflation. Thirdly, the ESRI recently estimated that the government would run a surplus in 2022, so even fiscal measures that aren’t ‘paid for’ need not necessarily lead to higher borrowing.
The timing of the 2023 budget is a political decision, an exercise in expectations management. In itself, bringing it forward a few weeks is unlikely to make a massive difference to people’s back pockets. But, given the extent to which inflation is being imported to Ireland, while control of monetary policy has been exported to Frankfurt, fiscal and regulatory policies are the government’s main levers to ease the burden.
Certainly, special attention needs to be paid to those at highest risk of energy and food poverty, those unable to heat their homes or put enough food on the table. But, Ireland needs a pay rise: wages and welfare rates need to increase significantly if we are to avoid the steepest fall in living standards since the dark days of 2009.
Victor Duggan is an economist.
To embed this post, copy the code below on your site
Carefully omits the elephant in the room: record profits. Inflation is being driven by the greedy and their cupidity is rapidly reaching the point of killing people. There is a simple solution: all governments, as a collective tell the profit takers to cut their profit taking, or said governments will take their profits. I’m sick of seeing billions suffer so some wrinkly old man can afford the new cookie cutter wifey and yet another super-yacht
@Felicity Rawson: inflation is principally driven by imported energy prices and food. Repeat after me?
@Felicity Rawson: i saw a report in the uk daid the top 350 companies there saw their profits increase on average by 73% since 2019. Nothing said about it. Apologies i dont have a link. It was referenced to twice in 2 seperate videos i saw
@Gert McNulty: Good table in this showing avg increase in profits versus average increase in wages https://www.theguardian.com/business/2022/apr/27/inflation-corporate-america-increased-prices-profits
@Felicity Rawson: yep electric Ireland and BP profits are staggering. Where is OPEC these days. They could easily product more oil but are very quite.
@Michael Dowling: A big part of the price of oil is due to an internal spat in OPEC. Saudi have vetoed Oman and the UAE raising their production. Also as OPEC countries are very low tax as they run their states on oil revenue low oil prices do not suit them either.
@Gert McNulty: don’t be a party popper! Those companies deserve such vast profits, let the pesky peasants grovel…. /Sarcasm!
@Felicity Rawson: simple solution, come on now
@Ro-your-nan: what about meat eggs dairy products..
The company I work for had a 937% increase in post tax profit in 2021 yet no wage increase, they won’t even buy a new chair for us.
@Stealth: if your company made 1 euro profit in 2020 and 937 in 2021 it would be a 937% increase. Without giving actual figures on the profits and the size of the company, total worth you’re cherry picking a figure you want people to find scandalous
@Stealth: if they had made a 937% loss would you take a substantial pay cut?
@Darren Byrne: It would be a 93600% increase.
@Anthony Guinnessy: @Darren Byrne:
You guys need to go back to school and learn percentages.
If a company earns €1 post tax profit in 2020, and €2 post tax profit in 2021, that’s a 100% increase in profit:
[(2-1)/1]x(100/1) % = 100%
If the post tax profit in 2021 was €10, that would be a 900% increase:
[(10-1)/1]x(100/1) % = (9×100) % = 900%
On the loss question, if you made €P in 2020 and €0 in 2021 that would be a 100% loss. This is largest loss you can have. You can’t have 937% loss!!!
Stop smoking weed for breakfast. It adversely impacts your cognitive ability!!!
Post tax profit was €2,278,594 if the company had a that type of loss I don’t think it would be a case of taking a pay cut as the company would have gone under.
The company give management an increase every year, should the lower paid not get an increase?
@Stealth: Yes, you are an employee not a shareholder. You’ve figured it out!
I would love to see the evidence of hospitality and construction wages falling. These are the two trades with a massive labour shortage but we are to believe that their wages are being cut? Pull the other one, this isn’t a MYTH it’s the authors opinion. Go place an advert for a chef or a block layer at a lower rate of pay, see how many applicants you get.
@Laura McCarthy: agree.
Once bitten, twice shy.
workers at the coal face in both industries have had enough of struggling and moved to different sectors. It is about wages and long hours.
Simple question. Why dont Economist ask them face to face for real factual analysis.
@Laura McCarthy: the link in that paragraph is to a cso report. Click through and you can see a chart in figure 4. Tada
This time feels a lot bleaker than 2009. 2009 was based on greed and banking. This appears more to be greed and a war from a greedy war lord? Ireland and R.O.W cannot control situations like Russian invasions. So they prop it up with flooding the economy with cheap money, or at least that’s why the U.S. is now in trouble. Which is now the knock on effect. Ireland needs support around an alternative to Electric Ireland for example who are hiking prices up way ahead of winter.
No mention of so called quantitative easing which has been going on for years. Too much money flooding economies bound to have inflationary effects.
@Declan Dalton: how that doesn’t get mentioned ….makes ya wonder…and inflation was happening before the war..
@Declan Dalton: the quantitive easing was to try and get inflation moving in the right direction and while it’s effectiveness can be questioned the idea behind it was solid. The extra money put into western economies for covid measures has had a massive impact on inflation but also the supply chain impact from companies downsizing through covid when demand fell through the floor is still being felt. I don’t think anyone sees the quantitative easing as the main reason for current inflation (asset inflation is a different story)
Energy companies are shamelessly price gouging customers, with massive profits being made. A lot of our energy is green energy and not reliant on international supply. Even Boris Johnson has introduced a windfall tax of 25% on energy companies, while our government as per usual is standing back and allowing it’s citizens to be fleeced by big business.
Mrs was in the butchers lately, 6 chicken fillets €11.99, usually around €5 last year..wtf.
@Ian O’Donovan: The chickens got a big pay rise at the start of the year.
@Tommy Berry: yep, we’re getting plucked big time
Government should be commended for there bus price reduction .. lol lol saving 40 cent a day won’t help people that are struggling
With all due respect to the author, they are repeating the Central Bank line which has always underestimated inflation. No one can state the future with any certainty.
@Mickety Dee: Also, the government’s opening offer to the public sector is a 2.5% rise per year suggesting they have data showing private sector increases in excess of that
Higher interest rates, rents crises,high inflation, higher fuel costs, high cost of housing, higher electricity prices, higher gas prices …… Australia
@Gerard O’Donovan: You’re missing a verb and a subject – are you saying that you’re affected by all of the above in Australia, or that the whole country would be better off emigrating there?
@Fiona Fitzgerald: I think he’s acknowledging that the Australians are suffering from all of the above too which is an excellent point
@Fiona Fitzgerald: yes all of the above. 100%.
@Anthony Guinnessy: I read it that we should all emigrate to Australia
@Dee: sorry for the confusion. I should have said equal’s
Inflation is almost entirely linked to logistics being absolutely decimated during Covid, including oil refineries. How can this article address the issue of inflation without looking at the major log jam in logistics? That’s the problem with economists, everything except the actual problems are looked at.
Central Banks and government in the West are an absolute disaster filled with people who don’t know what they are doing. Low interest rates has led to major speculation bubbles, particularly in real estate. Our economies are built on having more people in the future to pay for our pensions, while the opposite is occurring as people have less children. The answer is to import people while services get streched to the point of collapse.
Irish people are living in dreamland and if people want a good future then there are serious issues that need to be addressed, none of which are on the political agenda by any political party or talked about by the media.
Folie a deux is par for the course while we blindly creep to a point where there will be no return. Times are grim and will only get worse as our young political activists are more focused on their political identity than real issues that impact people and the future. Embarrassing.
I haven’t heard too many of these myths myself. As regards the back to the 1970s/wage-price spirals, however, the writer does seem to be encouraging us to make the same mistakes as in the 1970s, by implying that workers should be able to get wage increases to compensate for higher inflation. Just like in the 1970s, higher energy prices seem to be the source of inflation. This means that a country like Ireland that imports much of its energy is poorer – we have to spend more on imports. So the only those of us who are relatively poor in Ireland can hope to maintain our living standards is if those of us who are relatively well off are willing to see our living standards reduced.
I’m not remotely suggesting this is a bad thing, but I wouldn’t be too optimistic about it happening.
I’m disabled live alone have no family,I live out in the Country so I have no choice but to have a car,mine is an old car,I drive it for shopping 1 day a week,I’ve all the other bills that any other house has,working people,they have expenses that are un achievable,having Children must be such stress on the parents,,oh they done a good thing and dropped the price of public transport,that drives me mad,I know people who are driving from Tipperary to Cork everyday for their job,the only bus in rural places,is the school bus we see
Putin only has to drop oil production by five or ten percent to send western economies into a tail spin.
The Irish Government directly contributes to high inflation through one of the highest VAT rates in the world , low tax free income allowances that are never inflation adjussted annually and now punitive ” carbon” taxes . There are literally hundreds of dofferent taxes on everything from your credit card , your car , your house , your drink , your income , your assets , your electricity + gas etc …yet Government give away billions each year abroad to the EU in fees , to ” The Third World” , to funding embassies in irrelevant Countries etc . Even at home the waste is ohenomenal in rent for empty buildings , storage of useless e voting machines , funding thousands of economic migrants in hotels etc …. Irish Government is hooked on seeking approval from abroad and constant ” virtue signalling” rather than looking after it’s own peole first .
The introduction of RPZ shows the Govt are willing to tackle the issue? If you are LUCKY enough to pay €1000 p/m rent, and inflation is close to 9%, then the RPZ will say your landlord can increase rent to €1090 p/m, or €1080 extra a year. Seriously, a 9% annual return in a “controlled” market? Imagine your AVC or pension did the same!
have your say