Analysis: the price of goods and services in Ireland have increased year on year so is this trend likely to continue?
In July, average prices of goods and services in Ireland were 2.2% higher than average prices a year ago. The last time that a similar average price increase was recorded by the Consumer Price Index (CPI) was March 2012. In fact, over the last nine years, prices have either been very low (less than 1%) or falling (deflation) year on year. So what is behind this increase? Does it matter? And is the start of a period of higher price increases?
Every month, the Central Statistics Office publishes both the CPI and the Harmonised Index of Consumer Prices (HICP). While the CPI is the official Irish measure of price inflation (the increase in the overall level of prices), the HICP is designed to enable the comparison of overall price trends across EU countries. Certain items feature in the CPI, but not in the HICP: for example, the cost of using a house i.e. the rent that would be charged if the house was rented, mortgage interest, house insurance and local property tax currently feature in the CPI, but not in the HICP.
We need your consent to load this rte-player contentWe use rte-player to manage extra content that can set cookies on your device and collect data about your activity. Please review their details and accept them to load the content.Manage Preferences
From RTÉ Radio 1's News At One, RTÉ Economics Correspondent Robert Shortt on how inflation and property prices are on the rise in Ireland
The HICP used to calculate price inflation for the Euro area matters as it is used by the European Central Bank (ECB) to assess whether they are meeting their 2% price inflation target. In July, both CPI and HICP were 2.2%, putting Irish inflation above the critical 2% mark.
To understand changes in the average price level, it is useful to uncover what is happening to specific prices. The CSO provides a breakdown of price changes for the CPI across 12 categories of goods and services and their contribution to the overall change. The categories that contributed most significantly to the rise in prices between July 2020 and July 2021 were transport (up 8%), specifically fuel (12.8%), car and bicycle prices (6.8%) reflecting higher demand and supply shortages, air transport (16%) and housing, water, electricity, gas and other fuels (+5.3%) such as electricity, gas and other fuels which rose by almost 14%. In fact, if we exclude energy costs from the CPI, the average price level rose by a more modest 1.2%.
Clearly the post-pandemic resurgence in global demand (associated with the economy re-opening, rising vaccine take-up and continuing government and central bank stimulus) has increased the demand for global energy. In the case of oil, the increase in demand combined with slowly increasing supplies has meant that oil prices have increased over the last year by 74% from $43 a barrel to $75 a barrel.
We need your consent to load this rte-player contentWe use rte-player to manage extra content that can set cookies on your device and collect data about your activity. Please review their details and accept them to load the content.Manage Preferences
From RTÉ Radio 1's News At One, RTE Business Editor Will Goodbody on how higher utility and transport costs are driving inflation higher
There is also other evidence of price increases which are associated with rising demand, supply shortages or increasing regulation costs linked to the pandemic. Nine of the 12 categories show price increases, including restaurants and hotels (3.1%) particularly accommodation (13%), alcoholic beverages and tobacco (1.3%) and health (0.9%). Some categories that have overall reductions in prices, show individual components increasing e.g. in miscellaneous goods and services, we see increases for hairdressing (2.1%) and certain categories of insurance such as housing (4.6%) and health (4.1%).
If our wages are not rising in line with the increase in prices, then our purchasing power and the quantity of goods and services that we can buy is reduced. Similarly, with short term deposit rates near zero and companies paying negative rates, the real value of our deposits (our wealth), which increased by a phenomenal €44bn between February 2020 and June 2021, will be eroded by unexpected higher price inflation.
All price increases are not bad and central bankers generally argue for price inflation of around 2%. However, they do worry that higher price inflation can become embedded into people's psyche resulting in higher wage increases, which will further increase business costs and maintain or increase further the rate at which prices are rising. Their concern is that expectations of future inflation becomes "unanchored".
We need your consent to load this rte-player contentWe use rte-player to manage extra content that can set cookies on your device and collect data about your activity. Please review their details and accept them to load the content.Manage Preferences
From RTÉ Radio 1's Today with Claire Byrne, Charlie Weston from The Irish Independent on inflation-related price hikes set to hit consumers
If we look at the HICP measure of inflation for the Euro area, we can see that the flash estimate for July 2021 is also 2.2%. So, does this yearly increase of 2.2.% in prices in both the Euro area and Ireland in July, following on increases in the earlier part of the year, represent a further step towards a higher price inflation outlook, or is it just a temporary phenomenon?
Prices in July 2020 fell by 0.4% relative to July 2019. In fact, prices had started to fall, as would have been expected, in April 2020 as the pandemic hit. Energy prices were particularly affected (we noted earlier their importance for the recent inflation figures) and declined by over 6% between July 2019 and July 2020 according to CSO figures. Oil prices had fallen from $64 a barrel in January 2020 to €18 a barrel in April 2020.
We need your consent to load this rte-player contentWe use rte-player to manage extra content that can set cookies on your device and collect data about your activity. Please review their details and accept them to load the content.Manage Preferences
From RTÉ Archives, Michael Ryan reports for Seven Days in 1974 about the continuing rise in the cost of living due to inflation
What this means is that the percentage increase in energy prices that we see today year on year is due to their calculation from a low base and the ECB has commented on the temporary nature of these energy "base effects". As prices increase and are compared to a higher base price, we would expect these base effects will diminish. The ECB are projecting that this effect on price inflation in the Euro area will be gone by early 2022.
According to the ECB, higher price inflation will remain as demand continues to pick up, although they again view this as largely temporary, as other factors such as weak underlying wage pressure and the appreciating Euro will keep inflation under control. Similarly, expectations of inflation are projected to be subdued and under 2% over the next few years. The ECB's view on future inflation in the Euro area matters for us as it determines their next move on monetary policy, particularly interest rates.
We need your consent to load this rte-player contentWe use rte-player to manage extra content that can set cookies on your device and collect data about your activity. Please review their details and accept them to load the content.Manage Preferences
From RTÉ Radio 1's Morning Ireland, KBC Bank economist Austin Hughes on the ECB's new new 2% inflation target
What does this mean for future Irish inflation? There appears to be no immediate threat of persistent higher overall price inflation for goods and services in the future. However, we may still see price rises in particular sectors, which will affect average prices. The shortage of workers may put pressure on wages in these sectors, with the costs passed over to consumers as higher prices. Similarly, if workers gravitate back to their workplaces, the increase in private rents as recorded in the CPI over the last few months will continue to rise.
The views expressed here are those of the author and do not represent or reflect the views of RTÉ
