Jim Power: I want the Government to focus on energy prices, less on grocery outlets

The latest consumer price inflation data, this week, showed that food prices increased by 0.6% in April and by 13.1% over the past year.

The past week in Ireland was dominated by two events: The pressure from the Government on retailers to cut grocery prices and the announcement of the creation of a sovereign wealth fund to deal with projected budget surpluses.

It is extraordinary to see government pressurise private retailers to cut consumer prices. It is an intervention that smacks of an unpopular government that will try anything to curry favour with the voting public. It is blatant political populism, but given that the rest of the Dáil is at it, why shouldn’t everyone join in? The Labour Party is calling for a windfall tax on retailers. I guess the government response to the pandemic has changed the ground rules on involvement in our lives.

The available data on food tells us something. The supply chain is made up of three components: The primary producer or farmer; the manufacturer or processor, in the middle; and the consumer-facing retailer. There are wholesalers and and distributors, too, but these are the three key components.

I am not sure what sort of margins the retail grocery multiples are earning, because that is not publicly available. We will get some information on what the processors are doing, but there is plenty available on the primary producer.

The latest consumer price inflation data, this week, showed that food prices increased by 0.6% in April and by 13.1% over the past year. Between January 2021 and April 2023, average consumer food prices have increased by 18.4%, with vegetable prices up by 13.2% and milk prices up by over 35%.

Agricultural input prices have increased by 51.7%, with energy costs up by 62%; electricity costs up by over 99%; and fertiliser prices up by 181.6%. It has been evident for the past 15 months that food-price inflation would become a thing here, as it has in most countries. Ireland is not unique.

Food prices have increased for good reasons over the past couple of years, following a couple of decades of price compression, due to cheap food imports and intense retail competition as the market share of the discounters has grown. Primary producers need to be considered, as witnessed by the demise of horticulture in Ireland over the past decade. This is a salutary tale.

Prices falling

The good news for consumers is that global energy and food commodity prices are falling, and this will likely result in lower food prices for consumers over the coming months. Government, of course, will take credit, but I would much prefer more government focus on the energy companies and less on the grocery multiples.

In other news, the Finance Minister Michael McGrath announced the setting-up of a sovereign wealth fund. I am not sure why a second fund, with its associated costs, is being set up, as we already have a reserve fund that the Government has put €6bn into since last September.

Be that as it may, the fund will now be set up to deal with the expected exchequer surpluses over the coming years.

There are three things the Government could do with those surpluses, including spending some of it on housing, health and the other serious challenges facing the country; buying back debt and reducing the €226bn debt; or put the money into an investment fund.

Spending more on housing and health has an appeal, but we need to make sure that the money is spent wisely.

On paying down debt, the equation is not complicated. If the fund could deliver higher returns than the average cost of debt servicing, then investing would make more sense and vice-versa.

However, I still believe that a properly managed fund could deliver higher returns. The legal structure of the fund will be important, because we know what happened to the last fund during the banking crisis.