Irish Examiner view: Ireland is vulnerable to the paradox of thrift

Tightening our belts during high inflation makes sense, but it could contribute to a downward spiral for our economy

Cutting costs — perfectly sensible at any time, and essential during a period of high inflation — can have quite grisly consequences on the economy when we all do it, all at once. Stock picture

Taoiseach Micheál Martin is correct to state that our Government “cannot react on a weekly basis” to rising prices and costs. But that is exactly what consumers, most of whom are also voters, will be forced to do by the end of this year and probably beyond.

Irish manufacturing has experienced the sharpest rise in input prices since figures started to be collected 24 years ago. And while there has been a significant rise in orders, this is because customers are trying to buy forward to beat the next wave of increases. In other words, it is an unrepeatable phenomenon.

Micheál Martin warns that “higher energy prices are here for the longer term”, which means that shoppers and, homeowners, and parents can make a one-way bet on inflation.

It’s going north and will continue to do so. And this is before we have seen the outcome of Vladimir Putin’s “pay in roubles” gambit.

Western democracies have few choices in this game. They must find a fig leaf which allows them to maintain access to Russian oil and gas while maintaining the sanctity of sanctions or drastically reduce demand and usage. Or do something which accelerates the Kremlin’s appetite for negotiation.

Euro inflation is running at 5.1% in France ahead of the May general election, and 7% in Italy. It is 7.6% in Germany and almost 10% in Spain. Economists predict Irish inflation will peak at 8.5%, and possibly as much as 10%, by the early summer and remain at elevated levels through 2023.

All central banks are contemplating interest rate rises as a remedy which may push us into a full-blown recession.

Once people start to worry about their income and their employment, they tighten their belts and their spending. This generates what some economists call the paradox of thrift.

What is understandable, and indeed necessary, on an individual level has grisly consequences when widely applied.

Someone’s personal expenditure can support someone else’s job. We are walking through a storm here.