Sunday 21 April 2019

As food and shelter prices soar, cheap TVs don't mean much

Lower inflation levels have not led to dancing in the streets because consumers take less notice of price falls, says Austin Hughes

AUSTIN HUGHES

NEWS that Irish inflation was a good deal lower than expected and also below the European average in both July and August didn't exactly dominate headlines of late.

In large part, this is because good news on inflation seems to offer very little comfort at a time when economies and financial markets appear to be unravelling at an extraordinary rate.

Another reason why lower inflation didn't lead to dancing in the streets is that many people feel that the consumer price data compiled by the CSO figures bear little resemblance to what is happening to their personal cost of living.

Such views are not unique to Ireland. But even though the idea of "lies, damn lies, and statistics" sits easily with our natural cynicism, there isn't any serious concern that the inflation data are part of a deliberate Government misinformation campaign.

Instead, there is a ready acceptance that personal circumstances are unlikely to correspond to the fairly abstract statistical notion of the average Irish family that underlines CSO figures.

This means that while official inflation data might be very important from a national economic perspective, they seem to shed relatively limited light on any individual's personal experience of changes in their own cost of living.

If there is a sense that official data might not reflect individual circumstances, there is also a risk that most consumers tend to exaggerate their personal inflation rate. This is because we tend to be far more conscious of items whose prices are rising rather than those whose prices are falling. Certainly, international surveys suggest consumers usually exaggerate how quickly living costs are climbing.

How high is the real inflation rate? Where does the truth about inflation lie? Well, according to the CSO, Irish inflation was 4.3 per cent in the 12 months to August. In the light of gains in wages and social welfare payments in the past year, price increases on this scale would imply most of us are still seeing an improvement in living standards albeit of fairly modest proportions.

However, that is not what most people think. A recent IIB/ESRI Consumer Sentiment Survey revealed that only 1 in 10 consumers felt their living standards had improved in the past year while more than four times as many indicated their financial position had worsened. Although some consumers may be taking too pessimistic a view, many more are probably right to believe the cost of living has risen faster than official data imply.

A huge problem for the average family in Ireland and elsewhere is a dramatic surge in the cost of everyday essentials in the past year or two.

Extraordinary changes in the global economic landscape, in particular the emergence of China, have meant that the cost of food, fuel and credit have surged higher while the cost of clothing and electronic gadgets has fallen sharply.

While consumer prices have risen by 9 per cent overall in the past two years, the cost of food and shelter has jumped an altogether scarier 25 per cent. Our outlays on food and shelter are frequent and necessary. So, it is scarcely surprising that Irish consumers tend to focus on sharp increases in these areas and tend to downplay price drops in more discretionary purchases such as electrical equipment or air tickets.

Because different prices are moving in hugely different directions, the cost of living won't tend to rise at the same rate for all families. It is generally accepted that inflation tends to hit those on low incomes most severely.

With food, fuel and shelter prices climbing, severe strains more likely to be felt by those already stretched because of their limited means. Who is hurting most and least?

Among the most stretched today are those who bought a home in recent years. According to CSO data, monthly mortgage payments account for just under 7 per cent of the spend of the average Irish household -- but anyone with a mortgage of recent vintage is spending four or five times as much.

Recent home buyers have faced a massive increase in monthly outgoings because borrowing costs have risen repeatedly.

Mortgage woes have been compounded by rising fuel costs. As the typical first-time buyer has been forced to buy houses some considerable distance from work, more expensive commuting is adding further to living cost woes.

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