Business Irish

Sunday 26 February 2017

Putting the brakes on rising prices helped to ease the pain

Although some of our household costs have fallen, we've had to alter spending habits, writes Austin Hughes

THE economic downturn has been painful in a number of ways -- but even the darkest cloud can have a silver lining.

One important result of the crisis has been a large fall in Irish consumer prices and a much greater focus on getting value for money. Unfortunately, for most households this has been a fairly painful process.

Hit by a sharp drop in after-tax incomes, consumers have had to radically change spending habits fashioned in the boom. Alongside a major cutback in the amount of spending has been a more fundamental change in the brands and types of goods they buy. In turn, these changes have forced retailers and suppliers to compete aggressively for a much scarcer and more selective spend.

Irish consumer prices are unlikely to surge higher anytime soon but inflation data for April released during the week shows the third monthly increase in a row. This hints that the best news on prices may be behind us and consumers are going to have to shop even more carefully to make ends meet.

Although prices may continue to edge higher, there is little immediate threat of a dramatic rebound in inflation. Through the boom years Ireland had runaway prices in a runaway economy. Those now distant years saw prices rise much faster in Ireland than elsewhere and the recession has also seen prices here fall much further. Across the eurozone as a whole, prices fell for just three or four months in late 2008 and have been on a gently rising trend ever since. In Ireland, however, prices tumbled in the second half of 2008 and right through 2009. This brought living costs back to where they were in early 2007 and made it just a little easier for beleaguered Irish households to make the euro stretch further each month.

The dramatic drop in prices here relative to those abroad has had a wider impact. Together with the recent weakness of the euro against sterling, this has changed the economics of cross-border shopping significantly. According to official data, food prices in the UK have risen by 23 per cent more than Irish food prices in the past year.

For electrical equipment, this gap is anywhere between 15 and 50 per cent. Now, some prices in the North may have been far below those in the Republic to begin with. So there may still be the occasional bargain to be had in particular areas. But, on the basis of the official inflation figures, a sharp drop in prices in the South has fundamentally reduced the attractiveness of heading to the North to shop.

Tumbling prices may be altering Irish lifestyles in many ways. It could be that particularly sharp declines in the price of poultry (down 16 per cent) and, fresh fruit (down nearly 13 per cent) in the past 12 months would encourage a healthier diet. Equally, much lower prices for desserts and ice creams as well as biscuits (both down around 11 per cent) will continue to tempt those with a sweet tooth.

A large drop in clothing prices (down 11.5 per cent) might encourage more going out, but hefty increases in fuel costs (up 24.3 per cent) make it cheaper to stay in.

Significant changes in spending patterns also mean that many households' living costs have fallen faster than official statistics suggest. Long gone are the days of designer shopping, replaced at best by the occasional outlay on life's Lidl luxuries. It will be some time before official data show how dramatic these lifestyle changes have been. The Central Statistics Office is now undertaking a survey of household spending patterns but this won't translate into a new consumer price basket until the end of 2011.

The last reclassification -- which occurred at the peak of the boom in late 2006 -- saw streaky rashers, bottle gas heaters and synthetic carpets disappear from the list of consumer staples; and coffee makers and home cinema systems introduced as the Tiger roared. The likelihood is that the next revision will see a greater portion of spending redirected back to basic essentials.

Of course, the official data are based on the average spending of the average Irish family. Neither the boom nor the recession were distributed equally and consumers haven't all benefited to the same degree from a sharp drop in living costs. However, the fact that food and shelter costs have tumbled means that most Irish households have seen a real benefit.

To find out whether your cost of living has fallen more or less than the average, you should go to the personal cost of living calculator (you can find it on www.kbc.ie/colcalc) and calculate your own personal inflation rate.

Austin Hughes is an economist with the KBC Bank

Sunday Independent

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