Analysis: Key macroeconomic indicators may be positive, but the cost of living continues to be the biggest priority for much of the population
It has been a challenging year with increasing geopolitical tensions, tariff threats and economic policy uncertainty, yet key macroeconomic indicators for Ireland remain positive. The domestic economy is forecast to grow around 3% this year and continued growth is expected over the next two years. Recent data from the CSO shows that the number of people employed in the country is at another record high, albeit an increase in the unemployment rate indicates a slowdown in the labour market. Real wage growth has been positive for the last 18 months, reflecting average wage increases higher than inflation and therefore increased purchasing power.
But despite such headline figures, the cost of living was one of the top two priorities for 41% of the population in the latest poll from Ireland Thinks, second only to housing at 50%. With inflation a key concern for so many citizens and the inflation rate creeping to 2.9% last month, are we still in a cost of living crisis?
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From RTÉ Radio 1's Today with David McCullagh, home heating oil prices shoot up as cost of living rises
Behavioural biases can result in differences between perceptions of inflation (how much people perceive prices have increased) and the reality of inflation (objective measures of average price increases in the economy). For Ireland, the perception gap between actual and perceived inflation was relatively small in early 2022, but as Russia's invasion of Ukraine drove up price levels, the resulting cost of living increases dominated the national discourse.
Although inflation peaked towards the end of 2022, perception gaps actually widened as the inflation rate fell. In many subsequent months, people perceived the inflation rate to be more than double the actual rate. One reason for this disconnect between perception and reality is use of the availability heuristic, a mental shortcut whereby people rely heavily on information that is readily available to them in making assessments or decisions. As media coverage, political debate and water cooler discussions focused on the rising price level, more information on price rises became available, biasing perceptions upwards.
Another explanation for the overestimation of recent average price increases is that inflation perceptions are subject to frequency bias. Over the past few years, higher food prices have contributed to overall price level increases and the prices of many products frequently purchased by Irish households have increased substantially.
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From RTÉ Radio 1's Countrywide, why are beef prices going up?
For example, since December 2023, the price of beef has increased by nearly 27%, chocolate by 23%, and butter by 18%. Consumers' perceptions of overall levels of inflation are biased towards the inflation rates of items they purchase more often, so these high rates for commonly purchased items results in a higher perception of overall price increases. Even though the prices of goods we buy less frequently may not have risen by as much, or may even have fallen in some cases, the price increases of the goods we buy most often are the most salient.
Nevertheless, even when biases result in perceived inflation rates that are higher than objectively measured cost of living increases, it could still be the case that average households are struggling to pay their bills. One way to determine if this is the case is to look at household spending on items that are not necessities like groceries, rent or electricity. Discretionary spending on items that are wants rather than needs (such as meals out or cinema tickets) and spending on durable goods (such as washing machines or televisions) can be tracked to determine whether households are in financial difficulty.
When budgets are squeezed, spending on necessities is prioritised and other types of consumption spending are reduced. However, recent household data shows that both discretionary spending and spending on durable goods have increased year on year, 4.6% and 8% respectively, indicating that on average households are coping with the cost of living.
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From RTÉ Radio 1's Today with Claire Byrne, prices for Christmas are set to rise due to the cost of living crisis
Importantly though, these macro measures don’t reflect the distributional impact of inflation across different income levels. Poorer households who spend a much higher proportion of their income on essentials such as food and energy have faced higher rates of inflation than wealthier households.
Recent analysis from the ESRI found that inflation rates in 2022-2023 were 7% higher for the lowest income households and 5% lower for the highest income households than headline inflation rates. While average households and those in the upper half of the income distribution do not need cost of living supports, there is a significant minority who are struggling. For example, figures show almost 300,000 households are in arrears on their energy bills and the St Vinent De Paul charity reported at the end of October that calls for help were up 7% compared to last year.
The Irish Fiscal Advisory Council estimates that the Government's direct contribution to inflation has added €1,000 to a typical households’ annual bills
Although there have been calls from the opposition for energy credits to be paid once again this winter, universal supports are not needed and any additional measures need to be targeted. Government spending increases have repeatedly breached sustainable spending rules and these expenditure increases over recent years have directly increased prices for consumers.
The Irish Fiscal Advisory Council estimates that the Government’s direct contribution to inflation has added €1,000 to a typical households’ annual bills. There is not a universal cost of living crisis in Ireland, so universal measures are not needed. Although there is a definite feeling when you pop in to buy some groceries that €50 is the new €20, most of us are managing fine despite rising prices. Let’s hope it stays that way.
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The views expressed here are those of the author and do not represent or reflect the views of RTÉ
