John Whelan: The sky will not fall in but inflation remains far off target
Consumers have been dealing with soaring prices for food and other items. Consumer price inflation in Ireland is still running at four times the European Central Bank's 2% target. Picture: Denis Minihane.
While the post-pandemic surge in Ireland’s economy was driven by exuberant export sales, both will struggle to be maintained, but there are still some reasons for cheer as we enter 2023.
It’s clear the economy is slowing and recession is looming amongst our main trading partners. But, if the much-anticipated recession arrives, just how short or long it may be is anyone's guess.
However, heading into 2023, it should also be said that the sky isn’t falling in: The economic think tank ESRI and the Central Bank forecast that Ireland will continue in expansionary territory, anchored by the sustained global demand for pharmaceutical goods and ICT services, and Ireland’s continuing role in the global supply chain for these.
Amongst business leaders, recent surveys here and abroad indicate inflation is the most pressing issue as they plan for 2023. Many of the current inflationary pressures are a consequence of supply-chain bottlenecks lingering from the pandemic and shocks to the energy and food market from the war in Ukraine.
Therefore, it is important to assess how these inflationary factors are likely to evolve over the coming year.
The bottlenecks that have beset the global transportation and logistics industry appear to have receded, with container shipping costs and supplier delivery times for global manufacturing at their lowest level since 2019. The world’s container fleet has grown 11% since October 2019, which helps explain why container freight and ship charter rates have fallen so quickly during 2022, particularly in recent months. This easing of supply chain issues should reduce import costs in key Irish trading partner countries, supporting the forecast for continuity of demand for Irish exports.
November 2022 marked the first time in 17 months that inflation internationally fell, on the back of lower energy inflation. Many economists think this trend will continue but not necessarily every single month. In particular, the start of the year is expected to see important price increases on the back of inflation indexation wage demands and energy price pass-through.
However, we need to be honest with ourselves, consumer price inflation in Ireland is still running at four times the European Central Bank's 2% target. Ireland’s Central Bank revised upward their consumer price inflation forecast to 8% for the full year 2022 and 6.3% in 2023. Now whereas that is progress it’s still a long way from what all the central banks see as price stability.
The EU's executive is predicting that inflation would peak at 9.3% by year-end across the bloc and remain high in 2023 with a predicted inflation rate of 7%, due to its geographical proximity to the war and heavy reliance on gas imports from Russia.
The annual inflation rate in the UK eased a little to 10.7% in November of 2022. Bank of England, while failing to give a forecast for 2023 stated that they expected inflation in the UK to fall sharply from the middle of 2023. This along with the elevated EU inflation rate predictions, is a worry for Irish industry, as over half our imports come from these regions and bring the prospect of imported inflation for some time to come.
A rosier picture emerges from our biggest trading partner the US, where inflation was running at 7.1% in November, and is widely expected to fall sharply to 3.4% next year, despite the caveat from the Federal Reserve chairman Jerome Powel, that it is too early to say how conditions will develop in 2023. Added to this is the currency gain of the dollar which has strengthened almost 11% through the last nine months versus the euro. This has benefitted Irish firms exporting goods and services to the US, and should support export growth for at least the early part of 2023.
Cost-cutting and price hikes are the two major ways companies normally use to combat spiralling inflation. After years of rapid growth amid bumper profits, the tech sector is now firmly in cost-cutting mode. Some of tech’s biggest names, including Facebook, Amazon, and Twitter, have opted for mass layoffs, while others such as Microsoft and Apple have implemented a hiring freeze. Advertising revenue slowdown, higher interest rates, and surging inflation have brought an end to a decade of continuous rapid sales growth in the sector.
Of course, it’s not just the tech sector facing rising costs and battling with challenging macroeconomic conditions. Prices of food and non-alcoholic beverages in Ireland climbed 11.2% year-on-year in November of 2022, the sharpest increase in 38 years, according to the Central Statistics Office.
PepsiCo, like other major soft drinks food companies, have already hiked prices to offset rising costs. Fast-food chain Mcdonald's increased their hamburger prices by 13% during the summer, while butter prices increased by an average of 19% over the past year.
However, as seen with the tech sector, many companies are looking at their own costs of wages, packaging, and other production materials, in case they can’t push the price increases onto the consumer and revenue growth starts to crumble.
There are also other issues that could present longer-term problems. One such issue is the actual structure of supply chains — their complexity makes them hard to repair when a shock arises as they have been built to be efficient just-in-time systems, not resilient, as was evident during the early stages of the Covid pandemic. Add to this the trend in many countries to become sceptical about cross-border trade co-operation, as they pursue self-sufficiency in energy as well as other sectors such as healthcare products. Hence, the issues regarding supply chains may persist for longer than was initially thought.
There is also concern about the global demand for a green transition. This demand emerged due to the increasingly clear effects of climate change, which has now been compounded as countries seek to become more independent in terms of energy production, following the effects of the war in Ukraine and subsequent energy embargos on Russia. These shifts in demand will see the importance of certain goods change significantly. For example, demand for renewable energies has increased over the last few years, and these shifts in demand are being complicated by the US Inflation Reduction Act. The Act, parts of which come into effect on January 1, offers extensive grant aid to US companies to develop zero carbon products and may impact global trade patterns. Ireland, also seeking to make these transitions, will not be immune to disruption of established supply chains that may occur as a result.
Finally, current indicators are that central banks are likely to be able to tame inflation across 2023, but the green transition will be a multiyear adjustment as we try to transition to alternatives. A reliance on smaller producers in perhaps volatile regions of the world for certain commodities, or on renewables that are prone to the vagaries of the weather, may lead to higher prices and periods of shortages.
