Why are costs rising and how much worse will it get?

Mick McCrory of Finglas Fuel supplies in Dublin. The Government has announced an increased fuel allowance as part of a package of efforts to offset cost-of-living increases. 

It’s a familiar story to us now: A major crisis affecting large swathes of the population all at once.

The focus is on the Government to take action to address it, to support its citizens, and navigate the tricky waters ahead.

It then announces massive investment — hundreds of millions of euro — and a suite of measures aimed at mitigating the worst effects of the crisis.

For once in the last two years, we’re not talking about Covid-19. This time, it’s the cost of living.

Ticking along relatively slowly in 2020, an increase in the cost of so many things began to ramp up significantly in 2021, hitting record heights late in the year. 

It has ramped up to the point where, as the emphasis on the pandemic and its various restrictions lifts, a similar significance has been put squarely on what an impact the cost of living is having.

And with good reason. Charities and campaigners have been ramming home their points for months and, with the action now being taken, it’s clear the Government is now listening.

In November, the head of social justice for St Vincent de Paul told this newspaper that her organisation had received a call from a woman who didn’t know whether she should spend her last €10 on petrol for her car or on food.

Central to what’s driving all of this is inflation. And it’s because of the current levels of inflation that we’re all hearing about the cost-of-living crisis now.

So what is inflation?

If we were to go by the textbook Leaving Certificate economics definition, inflation is the rise of the general level of prices over a period of time.

In essence, it means the change in the price of the things individuals and households would regularly pay for.

Sometimes it can go up, as well as down. Right now, it’s only going one way.

The Central Statistics Office’s Consumer Price Index is the most common measure used in Ireland for inflation, as it collates 53,000 prices month-to-month and records how that price has changed.

It takes what it calls an “average” basket of around 615 goods and then attaches a “weight” to them to calculate inflation. When we say weight, we mean it factors in the importance of a particular item and why a price change in that would be more significant than the price change of another item.

For example, bread and milk are staples of many an Irish household. A sharp rise in the price of either of them would likely affect a large number of households. They’re given more weight than, for example, the price of a new camera.

The cost of childcare is given more weight than a trip to the cinema. And so on.

Why are we talking about it now?

Well, as we just mentioned the price of things has just been going up and up. And it’s been a generation since inflation has been this high.

In December 2021, the CSO recorded price inflation for the fourteenth month in a row.

In the same month, the annual change in the consumer price index was +5.5%. That means the average basket of goods rose significantly in the past year.

When we dig into that, it’s clear that the rise in some of the absolute necessities that households need was significant in many instances.

Bread is up over 5%, pasta up 6.4%, tea and coffee are up around 2%, fruit and veg is up, and so are butter and milk.

And that’s just food and drink. The elephant in the room has been the soaring energy costs, up 27.4% in the last year.

Similarly, petrol and diesel are both up a third and are creeping towards €2 a litre.

Are you renting? The CSO stats say they’re up 8.4% in the last year. The latest Daft.ie report this week suggested that rents rose 10.3% in the last year.

According to KBC chief economist Austin Hughes, the reason we’re hearing so much about inflation and seeing these effects of it now owes much to the pandemic.

“This isn’t the traditional inflation,” he said. “There’s no party at the moment driving up prices."

Rather than saying ‘let’s batten down the hatches’, I do think there is that sense that you need some sustenance to people at the moment.” 

Mr Hughes said that the high and rising oil prices for the last year have obviously had an immediate effect on the likes of fuel for cars and heating our homes, but the secondary effects are also now being felt.

“What happens there is there tends to be an impact that then seeps in, cost of fertiliser going up, transport going up because of fuel costs, it costs more for supermarkets to get goods delivered so their prices go up and so on.

“Those second recond impacts are in at the moment. That’ll remain in place for six to nine months.” 

What does it mean for me?

The impact that inflation is having is very much dependent on your income and your pre-existing outgoings (such as a mortgage, rent, childcare) and your travel and energy needs.

Transport commentator Conor Faughnan said that for a family that needs to use their vehicle for work, for example, the rising fuel costs was a “grim rise to what it is a regular bill”.

“It could be putting €20 onto the cost of running a car a week,” he said. 

“That’s having a significant impact. People’s travel requirements won’t change. But that other discretionary spend would have to, such as a family takeaway.” 

When it comes to Government supports in this area, the emphasis has been put on lower-income families who are disproportionately affected by the cost of living increases in the last year.

Mr Hughes said: “It affects the population almost entirely but it affects it to different degrees.

“There are lots of families [or] households struggling to make ends meet. In those circumstances, if your heat is costing you an extra €20 a week, then you’re in real trouble.

You might have to decide you’re going to cut back on the veg for dinner.” 

For more middle-income households, the cost of living increase could manifest into difficulties in meeting mortgage repayments alongside the high fuel costs and other basic necessities.

“It can affect everyone, but the thing is that for some people it doesn’t mean the difference between putting bread on the table or not,” Mr Hughes said. “For some it does.” 

Is it just an Irish thing?

It certainly isn’t, but we’re feeling the effects more than some others.

We are above the Eurozone average, but inflation across the bloc in December 2021 stood at 5% and it’s the high energy costs that stand out across Europe as driving inflation.

Last year, Ireland was the fourth most expensive for energy costs in the EU.

Mr Hughes said there’s nothing the Government can do to reverse the trend in global oil prices, transport costs, and semiconductor production that is feeding into inflation globally.

The hackneyed phrase of Ireland being a “small, open economy” means that these global changes often make their presence felt here.

It is therefore often hard to insulate Ireland from “nasty global developments” according to Mr Hughes.

However, in terms of the rising fuel costs, Mr Faughnan noted that it was taxes — including carbon taxes — on petrol and diesel that was also contributing to high costs many are facing.

“The current oil price isn’t unprecedented,” he said. “The fact it’s so expensive here is a choice of the Irish Government.” 

Is it here to stay? What can be done?

In the near-to-medium term, the view seems to be that the answer to this is an unfortunate yes. This is especially as those global factors outside of our control remain uncertain.

Central Bank governor Gabriel Makhlouf recently described the surge in energy prices as “spectacular” and said that while they expect energy prices to moderate by the end of 2022, “it may take time for people to experience it in view of the lag between wholesale and consumer prices”.

The next edition of the CSO’s consumer price index, due out next Thursday covering January 2022, may set a tone for the year with another expected rise in the cost of living.

KBC’s Mr Hughes also believes that the current inflationary pressures will persist for the next six-to-nine months.

“It will be painful, but what we need is to prevent inflation being built into the system,” he said.

“In the redesign of the post-Covid economy, you don’t want to make [high inflation] a feature.” 

Speaking ahead of the Government’s announcement of its package to deal with cost-of-living rises, Mr Hughes said targeted relief to those who need it most would be essential in supporting people in the near term.

“I do think with a bit of luck we can get to the other side of this,” he said. “It’ll be temporary.

It’s like a bad sting. Giving you pain relief doesn’t mean you’ll wake up tomorrow and there’ll be no pain. But it’s that bit to help you now.

“We have to bear in mind that it is very important to make sure the cost of living doesn’t really change the capacity to live for some households,” he added.