Elderly people and those who live in rural areas are disproportionately impacted by rising inflation compared to those living in urban areas, a new report has found.
Households over 65 experienced inflation of 7.2% while inflation remained under 7% amongst younger households, the Economic and Social Research Institute (ESRI) said in its latest report.
Younger people are reportedly more impacted by other cost pressures though like the rental market and house prices.
In response to higher prices, the European Central Bank (ECB) has signalled that monetary policy rates are set to increase over the coming quarters.
The proposed increase in interest rates will see Irish house prices fall by 2% relative to what they would otherwise be. However, demand and a sluggish supply response will continue to put upward pressure on house prices, said the ESRI report.
Average inflation is expected to be to ease to 7.1% in 2022 before lowering to 4% in 2023, said the think tank. Yet, financial challenges could get worse before they get better for Irish consumers.
Despite Ireland rebounding strongly from the pandemic, the domestic economy faces significant downside risks for 2022 as a number of challenges threaten global economic growth.
For example, the Russian invasion of Ukraine has heightened inflationary and supply chain pressures.
While direct trade between Ireland and Russia and Ukraine is limited, the price increases seen with global food items as well as surging costs of energy products are adding extra weight to domestic inflation.
The challenge for policymakers now will be to respond to higher inflation against a backdrop of tight labour markets and rising interest rates,” said Conor O’Toole of the ESRI.
The strain on low-income households in particular may put extra pressure on the public finances, and the Government may need to introduce targeted measures to assist with the increased cost of living, the report stated. Especially as Irish people are currently finding it harder to save.
Irish households have worse expectations about how much they will be saving in the coming year compared to the EU.
This possibly highlights Ireland’s particular vulnerability, as a small open economy, to the growing global economic uncertainty, said the report.
In May 2022, Irish households with the lowest income expected to save 10% less in the next 12 months than they expected a month previously.
In addition, since the start of the year, their expectations have dropped 18%.
Irish households did manage to save at the start of 2022 as the savings ratio increased by 21% for Q1.
This is likely in response to the growing uncertainty around the war in Ukraine, and the effect it will have on prices, which could lead households to reduce their consumption and increase their savings, said the report.
Due to the rising cost of living, ahead of this year’s budget the ESRI suggested areas that need investment are housing, the environment and healthcare.
The organisation also suggested that increases in current expenditure in areas such as public sector pay must be carefully considered.
Ireland’s strong labour market performance and growth in taxation receipts has had a positive impact on the public finances.
Along with the significant contingency fund set aside in the last budget, this allows the Government some scope in alleviating higher living costs for low-income households, stated the report.
Apart from inflation and supply chain issues, other risks pose a threat for Ireland’s economy. These include the UK government’s plan to remove elements of the Northern Ireland Protocol, which is escalating fears of further disruptions in trade.
Any escalation of trade tensions, including the prospect of a trade war, between the EU and the UK would have an impact on the Irish economy, the report said.
The ESRI therefore suggested that businesses may prefer to hold off on investment activity until negotiations return to a stable path.