Analysis: Inflation means you need €108.80 to buy the same goods you could have purchased with €100 three years ago
In economics there are no solutions, only trade-offs. Inflation consistently proves to be one of these trade-offs we are forced to deal with. Latest Central Statistics Office (CSO) figures show that we have just experienced the highest observed change in annual inflation since March 2024 when the rate was also up 2.9%. Unfortunately, for consumers, with Christmas sneaking up around the corner, one of the largest increases among products in these 12 months was food and non-alcoholic beverages (up 4.5%).
Using a CSO inflation calculator, we can actually track the decreasing value of money in real terms throughout the last few years. Let's take a value of €100 in October 2022. By October of the following year, inflation of 5.1% meant that you would need €105.10 to retain the same level of purchasing power. This October, you would have needed €108.80 to buy what you could have with €100 three years ago. The eroding value of our money is graphed in this graph which shows the near €10 loss we've experienced in the value of €100 over the last 3 years.
So where has the €8.80 gone? The primary reason given for the increase in food and non-alcoholic drinks was rising costs among products such as meat, milk, cheese, eggs, confectioneries, breads and cereals. Given that these items are key ingredients for products which we eat, their increasing expense results in an increase to the total cost of food and drinks wholesale.
Unfortunately for consumers, this cost gets passed onto us at the till. The interconnectedness of the Irish economy is such that there is never one explanation for any given outcome. Several reasons could explain the rising costs of ingredients for food. Among them are agricultural cost pressures resulting from increased pressure from environmental regulation as well as a Bord Bia projection for a reduction of 87,000 in cattle stock this year. This limits the revenue which farmers can generate from their activities which means the cost of production has to go up to ensure financial stability.
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From RTÉ Radio 1's Today with Claire Byrne, why the cost of living crisis means the cost of Christmas will rise
The trade-off associated with increasing environmental regulation of the agricultural sector is upward pressure on the costs of key inputs in our food products. Beyond these obvious supply chain issues, there is also the role that our own government have played in inflation.
The Irish Government has now for the last few budgets consistently overspent and breached the +5% net spend rule suggested by the Irish Fiscal Council Advisory (IFCA). The IFCA pointed out that the spending in this year's budget are likely to be more than double what was announced in the budget last October. To quote the Nobel Laureate, Milton Freidman, inflation is always and everywhere, a monetary phenomenon.
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From RTÉ Radio 1's Morning Ireland, 'my grocery prices have soared'
Another trade-off which the Government must live with is that they can’t keep consistently overspending without inducing inflation. Inflation occurs whenever the growth rate for money circulating the economy is greater than the growth rate of real GDP. Essentially, if there is more money relative to produced goods and services which can be bought with money, inflation occurs.
One of the measures taken by the Government in their budget was to provide a VAT reduction for the hospitality sector and an increased R&D tax credit for businesses. Ideally, this should lead to savings and growth for those firms via reduced taxes and innovation respectively. Subsequently, it would be expected that these savings and growth would lead to reductions in prices charged to consumers or increases in the money paid to workers. Whether this will turn out to be the case or not, we have to wait and see.
READ: What Lidl's milk price cut tells us about supermarket price wars
For now, the Government must grapple with difficult future decisions regarding the curtailment of inflation. This often involves unpopular spending cuts which are generally deemed to be political suicide. While I don’t envy the Government’s task of reducing inflation, we can’t keep losing close to 10% of our income every three years.
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The views expressed here are those of the author and do not represent or reflect the views of RTÉ
