Why are costs rising and how much worse will it get?
It is a story that is familiar to us now: a major crisis affecting large sections of the population simultaneously.
The focus is on the government to take action to address this, to support its citizens and navigate the difficult waters ahead.
He then announces massive investments – hundreds of millions of euros – and a series of measures aimed at mitigating the worst effects of the crisis.
For once in two years, we are not talking about the Covid-19. This time it’s the cost of living.
Unfolding relatively slowly in 2020, an increase in the cost of so many things began to increase significantly in 2021, reaching record highs by the end of the year.
It has intensified to the point where, as the focus shifts to the pandemic and its various restrictions, similar importance has been given to the impact of the cost of living.
And with good reason. Charities and campaigners have been making their case for months and with action taken, it is clear the government is now listening.
In November, the social justice officer for St Vincent de Paul told this newspaper that her organization had received a call from a woman who was unsure whether she should spend her last £10 on petrol for her car or on food. .
Inflation is at the heart of it all. And it is because of the current levels of inflation that we all hear about the cost of living crisis.
If we were to follow the school leaving certificate economics textbook definition, inflation is the rise in the general level of prices over a period of time.
Essentially, it means the change in price of things that individuals and households would pay for on a regular basis.
Sometimes it can go up as well as down. So far, it’s only going one way.
The Central Statistics Office’s Consumer Price Index is the most commonly used measure of inflation in Ireland, as it collects 53,000 prices from month to month and records the movement of that price.
It takes what it calls an “average” basket of about 615 goods, then attaches a “weight” to them to calculate inflation. When we talk about weight, we mean that it takes into account the importance of a particular item and why a change in price of it would be greater than the change in price of another item. .
For example, bread and milk are staple foods for many Irish homes. A sharp rise in the price of either would likely affect a large number of households. They carry more weight than, say, the price of a new camera.
The cost of childcare trumps a trip to the movies. etc
Well, as we just mentioned, the price of things is only going up. And it’s been a generation since inflation has been this high.
In December 2021, the CSO recorded price inflation for the fourteenth consecutive month.
During the same month, the annual change in the consumer price index was +5.5%. This means that the average basket of goods has increased significantly over the past year.
When we dig deeper into this, it is clear that the increase in some of the absolute necessities that households need has been significant in many cases.
Bread is up more than 5%, pasta up 6.4%, tea and coffee up around 2%, fruit and vegetables up, as is butter and milk.
And that’s just food and drink. The elephant in the room has been soaring energy costs, up 27.4% over the past year.
Similarly, petrol and diesel both gained a third and slipped towards €2 per litre.
You are a tenant ? CSO statistics indicate that they increased by 8.4% last year. The latest Daft.ie report this week suggested that rents have risen by 10.3% over the past year.
According to KBC Chief Economist Austin Hughes, the reason we hear so much about inflation and see its effects now owes a lot to the pandemic.
“It’s not traditional inflation,” he said. “There is no party at the moment that drives up the prices.”
Rather than saying ‘let’s batten down the hatches’, I think there’s this feeling that you need food for people right now.”
Mr Hughes said the high and rising oil prices over the past year have obviously had an immediate effect on the tastes of fuel for cars and heating our homes, but the side effects are also being felt.
“What happens there is that there is usually an impact that seeps through, the cost of fertilizers goes up, transport goes up because of fuel costs, it costs supermarkets more to have them delivered the goods, therefore their prices increase, etc.
“These second reconstruction impacts are ongoing at the moment. This will remain in place for six to nine months.
The impact of inflation depends a lot on your pre-existing income and expenses (such as a mortgage, rent, child care) and your travel and energy needs.
Transport commentator Conor Faughnan said that for a family needing to use their vehicle for work, for example, rising fuel costs were a “bleak increase from what it is. regular bill”.
“That could put €20 on the cost of running a car a week,” he said.
“It has a significant impact. People’s travel requirements will not change. But those other discretionary expenses should, like a take-out family meal.
In terms of government support in this area, the focus has been on low-income families who are disproportionately affected by the rising cost of living over the past year.
Mr Hughes said: ‘It almost entirely affects people, but it affects them to varying degrees.
“There are a lot of families [or] households are struggling to make ends meet. In these circumstances, if your heating is costing you €20 more per week, then you are in deep trouble.
You may need to decide to cut back on vegetables for dinner.
For more middle-income households, the rising cost of living could mean difficulty meeting mortgage repayments, as well as high costs for fuel and other basic necessities.
“It can affect anyone, but the fact is that for some people it doesn’t make the difference between putting bread on the table or not,” Mr Hughes said. “For some, it is.”
It certainly isn’t, but we feel the effects more than others.
We are above the eurozone average, but bloc-wide inflation in December 2021 was 5% and it is high energy costs that stand out across Europe as the engine of inflation.
Last year, Ireland was the fourth most expensive country in terms of energy costs in the EU.
Mr Hughes said the government could do nothing to reverse the trend in global oil prices, transport costs and semiconductor production which is fueling inflation globally.
The well-worn phrase that Ireland is a ‘small open economy’ means that these global changes often make their presence felt here.
It is therefore often difficult to insulate Ireland from “bad global developments” according to Mr Hughes.
However, when it comes to rising fuel costs, Faughnan noted that it is taxes – including carbon taxes – on gasoline and diesel that also contribute to the high costs many face.
“The current price of oil is not unprecedented,” he said. “The fact that it’s so expensive here is a choice of the Irish government.”
In the short to medium term, the opinion seems to be that the answer to this question is an unfortunate yes. This is all the more so as these global factors beyond our control remain uncertain.
Central Bank Governor Gabriel Makhlouf recently called the spike in energy prices “spectacular” and said that while they expect energy prices to moderate by end of 2022, “it may take time for people to experience this given the lag between wholesale and consumer pricing.”
The next edition of the CSO Consumer Price Index, due next Thursday and covering January 2022, could set the tone for the year with another expected rise in the cost of living.
KBC’s Hughes also believes that current inflationary pressures will persist over the next six to nine months.
“It will be painful, but what we need is to prevent inflation from entering the system,” he said.
“In the post-Covid economic overhaul, you don’t want to do [high inflation] a characteristic.”
Speaking ahead of the government’s announcement of its rising cost-of-living package, Mr Hughes said targeted aid to those most in need would be essential to support the short-term people.
“I think with a bit of luck we can get through to the other side,” he said. “It will be temporary.
It’s like a bad injection. Giving you pain relief doesn’t mean you’ll wake up tomorrow and there won’t be any pain. But it’s this bit to help you now.
“We have to bear in mind that it is very important to ensure that the cost of living does not really change the ability to live of certain households,” he added.