Sunday 21 January 2018

Ireland's basket of ever-rising prices adds to economic pain

Rising consumer costs and falling incomes means a painful squeeze on people's living standards, writes Austin Hughes

IN normal times, consumers pay a lot of attention to changes in their cost of living but these aren't normal times. The living standards of most Irish households have fallen in recent years -- not because of rising prices but because of much lower incomes.

Between the second half of 2008 and early 2010, Ireland was one of very few economies where consumer prices fell almost continuously. Unfortunately, a sharp drop in earnings, much higher taxation and lower benefits meant the average Irish family saw after-tax incomes drop around 10 per cent. So, lower consumer prices didn't prevent what has been for many a dramatic fall in living standards.

A drop in domestic costs may be necessary to improve competitiveness in the Irish economy -- but it is painful medicine. In 2011, downward pressure on incomes continued thanks to a weak jobs market and a very tough Budget.

Unfortunately, last year also saw a return to rising consumer prices. This means most people's living standards were caught in a particularly painful pincer movement.

Price data published by the CSO during the week show that in the year to December last, there were significant increases in the cost of a wide range of goods and services that Irish consumers need to buy, which was only partly offset by falling prices for many "discretionary" purchases.

Food prices rose because of strong increases in the cost of a wide range of staples, including butter (+9.6 per cent), eggs (+6.9 per cent), cheese (+5.4 per cent), beef (+5.3 per cent) and breakfast cereals (+5.0 per cent). Shelter was also more expensive, driven by higher mortgage costs (+14.1 per cent) and a slight increase in rents (+1.5 per cent). The cost of light and heating jumped 11.2 per cent and motor fuels were nearly 7 per cent higher. Higher hospital charges (+9.8 per cent) and education costs (+8.9 per cent) also hit many hard-pressed households, as did a very sharp increase in health insurance costs (+22.9 per cent).

If many necessities cost significantly more in 2011, Ireland's measured inflation rate was dampened by continuing sharp reductions in a range of more "discretionary" purchases, such as computers (-21.0 per cent), toys (-8.3 per cent) and TVs (-7.5 per cent). A drop in the cost of eating and drinking out (-0.7 per cent) and nightclub admissions (-6.8 per cent) only helped those with some wherewithal to spend. Similarly, cheaper carpets (-9.9 per cent) and furniture (-4.9 per cent) assisted the few who are moving or refurbishing their homes at present. So, in broad terms, 2011 saw the cost of many essentials rise while the prices of many "avoidables" fell.

Through 2012 and 2013, higher VAT and a range of new or increased public sector changes will cause more pain for Irish consumers. However, it is the ability to make a living rather than the cost of living here that will determine whether many young people stay or leave.

As our panel shows, in many instances, those who depart may find the cost of living abroad is more comparable to the "new" Ireland -- a small sign of some small progress towards an eventual turnaround in this economy.

Austin Hughes is the chief economist at KBC Bank Ireland

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