Cost of living crisis: how can it be the government's fault? Giving away borrowed money makes little sense. It just means higher future taxes or less money available for housing & health.

Jim Power

STATE INTERVENTION REACHING NEW AND RIDICULOUS HEIGHTS

The ‘cost of living’ crisis has rapidly overtaken the ‘housing crisis’ as the issue of the day in Ireland. Opinion polls in one newspaper at the weekend suggest it has overtaken housing as the main concern for the Irish public and Covid seems to have been relegated to a dim and distant memory. Indeed, anybody who attended or viewed the great Irish victory over Wales on Saturday (sorry Chris) would have been joyed to see a full house again, and I myself attended Waterford’s opening hurling league game versus Dublin on Sunday, and it was a great feeling to be in a packed stand again. Covid may not be gone away, but life is becoming somewhat more normal. Long may it continue.  However, I digress and it is time to get back to the ‘cost of living’ crisis.

In the year to December, average Irish consumer prices increased by 5.5 per cent, which is the highest annual rate of inflation since April 2001. The drivers of this price increase are not terribly surprising to anybody who has been tracking global energy prices over recent months and the Irish housing market. A lot of it has got to do with energy and related issues, but housing is also making a significant contribution. 

In the year to December:

·      Electricity prices increased by 22.4 per cent.

·      Gas prices increased by 27.7 per cent.

·      Airfares increased by 66 per cent.

·      Diesel prices increased by 36 per cent.

·      Petrol prices increased by 32 per cent.

·      Home heating oil increased by 53 per cent.

·      Rents increased by 8.4 per cent.

All of these increases are related to oil, gas or housing in the main. Unfortunately, this situation does not look like getting better anytime soon. Brent Crude is trading at $92.60 per barrel, which represents an annual increase of almost 53 per cent; natural gas prices are 49.3 per cent higher; and heating oil is up by almost 65 per cent. Due to a combination of strong demand, some of it weather related; supply constraints and Russian hostilities, energy markets are currently very nervous and some analysts expect oil to top $100 per barrel quite soon. What happens natural gas prices will be determined by Putin for the foreseeable.

It seems likely that these energy-related issues will continue to drive consumer prices higher over the coming months. In addition, the implementation of the €7.50 increase in the carbon tax on home heating fuels in May will exacerbate the energy-related cost of living increase, but at least that is coming at a time of the year when one would expect demand to be falling.  Rents are likely to continue rising due to pretty obvious dysfunctionality in the housing market. The January inflation number should also include the impact of minimum unit pricing on alcohol, and we are now even starting to see some food price inflation creeping in to the system after an absence of many years.

There is now a distinct risk that a transitory inflation situation could morph into something more structural as an inflationary psychology starts to become embedded in the system. Producers facing significantly higher input costs will increasingly seek to pass this on to maintain margins; workers will push for higher wages, because they can in an increasingly tight labour market; and other vendors of goods and services will just use the current environment to push through price increases that were not possible in the disinflationary environment that has prevailed for some time. A transitory inflation problem can quickly become something more semi-permanent.

Irish inflation is currently been driven by a combination of cost-push and demand-pull pressures, and nobody can tell at this stage where it will all end.

There appears to be a strong sense of victimhood here in Ireland about this cost-of-living squeeze, and that government is somehow responsible for it. Let’s not forget that Ireland is not alone, and virtually every country in the developed world is currently grappling with the highest rates of inflation in decades.

Those of us of a certain vintage will have lived through cost-of-living squeezes in the past, not least twice in the 1970s. However, what appears to make this squeeze different is the indignant expectation that the nanny State will have to step in to solve a problem that is not of its own making in the main.

We have seen the ridiculous and expensive decision to grant a universal €100 credit on electricity bills next month, and the Government is set to announce a range of similar ill-advised measures over the coming days. The concept of universality can become very expensive in a scenario such as this. There are many calls on the public purse, and given that resources are by definition limited, a more prioritised approach by government would be better. However, in a world that is becoming increasingly driven by populist politics, such prioritisation is not possible.

This notion that the State should step in at every opportunity is a reflection of the increasingly populist nature of politics, where politicians in opposition promise to spend large amounts of money to solve all problems. Of course, we shouldn’t forget that the State has created somewhat of a precedent by rightly or wrongly (that is a matter of opinion) stepping in over a decade ago to pump billions into saving the banking system, and then stepping in from March 2020 onwards to pump billions into helping households and businesses deal with the pandemic.

One can agree or disagree with the nature of those interventions, but it has definitely created a precedent and expectation that the role of the State is to step in and address every problem by simply spending taxpayers’ money. The question of course is where all of this is going to end?