Guerrilla warfare between consumers and retailers triggers feel-bad factor

Austin Hughes

June 23 2013 04:03 AM

MAKING ends meet remains the key task facing many Irish households but it seems like a very long time since the main threat to their spending power was coming from spiralling prices.

The inflation rate in Ireland and in most western economies is now low, possibly dangerously low. Although historians suggest that periods of falling prices were quite common in the distant past, the experience of almost 60 years has been one in which flat or falling prices has been very unusual and rapidly rising prices were regarded as the major risk to economic prosperity.

So, what does very low inflation mean for Irish consumers?

The same forces that are restraining Irish consumer prices are also pushing down on Irish incomes. Over time that should make the Irish economy more competitive and there has been some evidence of this improvement in trends in exports and foreign direct investment of late.

However, from the perspective of the average consumer, it's more normal to focus on the pain of downward pressure on spending power rather than any easing in inflation.

Looking through the huge variations in trends across different price categories, it is also clear why the 'average' consumer may not feel that their own personal inflation experience is as benign as the official data would suggest. The cost of many food staples – beef (+2.6 per cent), poultry (+2.6 per cent) and potatoes (+36.3 per cent) is rising. So, declines in other areas are probably less 'visible' to the average shopper.

That said, the economic downturn has made most households altogether more likely to alter what they buy either in response to outsized price increases or increasingly common 'special' offers. This altogether more price-conscious attitude towards shopping is a key downward force on Irish inflation today. However, this 'guerrilla warfare' between consumers and retailers doesn't tend to inspire a 'feel-good factor'.

Similarly, the fact that there has been significant increases in areas such as the prices of natural gas (+7.8 per cent) and electricity (+5.8 per cent) tends to encourage the view that living costs are rising more rapidly than official data suggests. The price of other necessities such as prescribed drugs (+6.6 per cent), health insurance (+12.5 per cent) and bus (+10.6 per cent) and train (+4.9 per cent) fares also continues to climb.

So, it is likely that hard-pressed households are not too focussed on the fact that the prices of electronic equipment (-13.0 per cent), plants and flowers (-7.9 per cent) or handbags and prams (-13.1 per cent) are tumbling.

Interestingly, our analysis suggests that the downward trend in prices is likely to be most pronounced in those goods and services more typically bought by younger age groups.

The economic downturn has been severe for the under-35s in terms of job losses. Although changes in relative prices are unlikely to provide any dramatic relief, at the margin the drop in the relative cost of living for younger age groups goes some small way towards reducing this significant imbalance.

Austin Hughes is chief economist at KBC Bank