Inflation returns to stalk Ireland like it's the 1970s 

The legacy of Covid-19 is having a massive impact on supply chains and shipping costs and is pushing prices up across the globe

Economist Jim Power: Phenomenal price increases will have a very profound impact on Irish consumers over the coming months.

I vaguely remember when in the 1970s and most of the 1980s inflation was a thing. Over the past couple of decades in marked contrast, the phenomenon of rapidly rising prices has not attracted much attention and in fact central bankers have been more concerned about the lack of rather than the existence of the phenomenon. Over the past few months all has changed utterly. 

To me, it does seem a little surreal to see the topic featuring in the news headlines once again. The CSO last week data showed the annual rate of price increase had jumped to 5.3% in November, which is the highest rate since June 2001. Most of the price pressures are emanating from two old reliables: The housing market and energy prices.

Private rents increased by over 8% but there are no surprises here, as this trend has unfortunately become well established in recent years and is another indicator of a failed housing policy. 

Oil and gas prices have increased significantly in the past year and this is now feeding through to a range of energy-related prices. Brent crude prices are currently up 45% this year and natural gas prices are up almost 50%. These increases have fed into an increase of almost 21% in electricity prices; over 26% in gas prices; over 71% in home heating oil; 26% hikes in petrol prices; over 29% in diesel prices and around 65% in the average price of flights. The cost of accommodation, which is not directly related to oil, is up by almost 22%.

These are all phenomenal price increases that will have a very profound impact on Irish consumers over the coming months. Unfortunately, these price increases are occurring at the beginning of what is so far a pretty cold, windy, and wet winter, and so the use of the car is by necessity high, and electricity, gas, and home heating oil usage is elevated. 

There's not a lot most consumers can do about expenditure on these necessities, so inevitably expenditure will be diverted away from non-essentials by financially-stretched households.

Government will have to help ease some of the energy-related pressures, although they have no part to play in those pressures.

While the recent price increases here are quite horrendous, it is important to bear in mind that we are not alone. Inflation in the US is currently running at 6.8%, a 40-year high; across the eurozone at 4.9%; in Germany at 6%; at 4.2% in Boris’s kingdom; and globally at 5.3%. 

The legacy of Covid-19 is very real and is having a massive impact on supply chains, shipping costs, and the general dynamics of demand and supply. In other words, repressed demand is coming alive and is encountering limited supply. 

It is also unfortunate that the Covid impact is not yet finished, and Omicron and the restrictions that may inevitably be put in place to deal with it over the coming weeks could just further complicate global supply chains and ensure that the "transitory" period of inflation might be extended further. On the positive side, oil prices are likely to have peaked and this could have a significant impact on year-on-year price comparisons at 2022 progresses. Here’s hoping.

For central bankers it is a real dilemma. 

The DNA of central bankers is to hate and fear inflation to varying degrees across different jurisdictions, and to respond quickly with higher interest rates once it rears its ugly head. The options are not quite as straightforward at the moment. 

The US Federal Reserve does appear ready to pull the monetary policy trigger. Here in Europe, the ECB is still arguing that the surge in inflation is temporary. It recognises that increasing interest rates prematurely could pose risks to an economic recovery that is again under renewed threat from Omicron and could push up borrowing for many countries across the eurozone who are running significant but necessary budget deficits in response to Covid. The policy mistakes of the ECB in 2011 is still a raw nerve in the ECB.

All in all, we are living through very strange times. Unfortunately, there is much more of the same to come.