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Consumer has power despite inflation fear

IT would be wrong to say that Irish consumers face a period of runaway inflation, but there is little doubt that their already limited spending power will be squeezed even further by the notably less favourable trend in prices that is now emerging.

The rise in Irish consumer prices in the past six months is the fastest since the summer of 2008 and it seems likely that the cost of living will creep higher in the months ahead.

For the past couple of years, a clear if modest fall in Irish consumer prices has helped many families struggling to make ends meet. Unfortunately, led by higher fuel prices and interest rates, household bills have started to climb again and sharp increases in a range of areas such as insurance costs and hospital charges in the last six months have increased the sense that living costs are picking up sharply.

While world oil prices are notoriously volatile, the risk is that energy will get more expensive in the future. Rapidly increasing demand from fast-growing economies such as China together with ongoing threats of disruption to supply because of factors as diverse as the weather and fragile political situations in many oil-producing countries give grounds for concern.

It also seems inevitable that interest rates will climb further as the ECB appears set on raising interest rates from what it sees as "emergency" levels to more normal settings. So, international factors look set to drive up Irish household bills in the next year or two.

If irresistible forces are acting to push up the cost of living for Irish consumers, some unmoveable forces may also be emerging that suggest Irish consumers will put up determined opposition to rapidly rising prices. Comparing like for like, Irish inflation remains the lowest in the eurozone by some considerable distance.

Indeed, in April, it was the only country of the 17 that make up EMU where inflation didn't exceed the ECB's inflation target. Big deal, you may say. Low Irish inflation simply reflects how weak the economy is.

While there is a germ of truth in this argument, it doesn't tell the full story. Inflation rates in Greece, Spain and Portugal, other troubled econ- omies, are way above the eurozone average. So, something is happening to the way Irish consumers behave.

It seems that the trauma of the past couple of years has changed Irish spending habits markedly. Long gone are the days of conspicuous consumption when paying more testified to how well you were doing. Now spending is very selective -- what is needed is bought where it's cheapest.

This much-increased price consciousness doesn't just help make money stretch to the end of the month. It will also help rebuild the competitiveness of the Irish economy that is vital to restoring growth in incomes and employment.

Of course, there is a great deal more to be done, particularly in a range of professional services activities where consumers can't choose a cheaper 'own brand' alternative. If progress can be made in these areas, then the outlook for Irish consumer spending power will become a good deal brighter, even in the face of higher inflation worldwide.

Austin Hughes is chief economist with KBC Bank Ireland

Sunday Indo Business