Consumer sentiment drops as 'households face €2,000 hit from surging prices'

Most consumers say they plan to cut back their spending this year.

Shoppers on Cork's Oliver Plunkett St. Picture: Eddie O'Hare

Consumer confidence is plummeting at the fastest rate since the onset of the Covid pandemic two years ago, as households face an average hit of €2,000 to their living standards from soaring energy and food prices, a major survey has unveiled.

The findings of the KBC Bank survey adds to evidence that living standards face an extraordinary challenge as fears grow that the Russian invasion of Ukraine will lead to inflation getting out of control.

We estimate the economy-wide hit from higher inflation could be over €4bn, or about €2,000 per household,” said Austin Hughes, chief economist at KBC.

Most consumers say they plan to cut back spending this year, and almost half suggest they will cut by a large amount.

Mr Hughes said the latest drop in consumer confidence here was the largest since April 2020, when swathes of the economy were shut down during the first of the Covid lockdowns.

The prices of many goods have fallen in the past decade, but consumers are now undergoing something of “a sea change” in their expectations.

The Irish consumer is probably punch drunk after the financial crisis, Brexit, Covid, and now war in Ukraine,” said Mr Hughes.

The sentiment survey “signalled a marked change in thinking and suggests a material downgrade of the economic and financial outlook by Irish consumers”, according to KBC.

“The March survey saw a sharp worsening of the general economic outlook and a similarly large weakening in consumers thinking on the prospects for their own household finances that likely reflects notably increased inflation fears,” according to the survey.

Consumer confidence is falling across the rest of the eurozone too, as Russia’s invasion threatens to exacerbate already-record inflation. A monthly gauge from the European Commission showed that consumers were increasingly gloomy in March.

The war in Europe has prompted fears that inflation will quicken while economic expansion stalls. 

In a “severe” scenario of an escalating conflict and even broader sanctions in response, the ECB sees price gains accelerating to 7.1% this year, with growth at just 2.3%.

In Ireland, consumers are still confident about the outlook for jobs, according to the KBC survey. That chimes with most major economic surveys that project the economy will grow strongly, employment levels will rise, and unemployment will fall this year, even as inflation surges.

The ESRI this week projected that consumer price inflation will peak in early summer at 8.5% — up from 5.6% last month — before moderating. Irish inflation remains hugely elevated, at 5% in 2023, it forecast.

The think-tank said that although the Ukraine war has ratcheted up the risks, the economy will nonetheless expand rapidly this year and in 2023, as long as there are no new major shocks to the supply of energy to global markets.

The economy will expand 6.2% this year and by 4.3% in 2023, in GDP terms, the ESRI has projected. It also said the public finances had emerged from the Covid crisis in good shape.