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Government is walking wobbly tightrope on cost-of-living

By February 11, 2022No Comments

When Micheál Martin announced an earlier than expected easing of restrictions just three weeks ago, relief was in the air.

The worst of the pandemic appeared to be in the rear-view mirror, the economy was starting to recover strongly and his Government could finally look to tackle other important issues that had been put on ice during the pandemic.

But then came inflation.

The cost of living had been steadily building over the last year, rising gradually from 0% in March to a 20-year high of 5.5% in December.

However, it only really burst onto the political stage as an issue in recent weeks as the focus on the Covid crisis eased.

The Government had, to be fair, seen it coming and took some steps in the budget in October to soften some of the effects.

It also announced the €100 energy credit in December aimed at defraying part of the cost of soaring energy bills.

The assistance has not been sufficient though to placate voters, who are being squeezed at the supermarket checkout, the petrol pumps and through the bills dropping on to their front door mat each week.

Every little helps

So yesterday’s announcement of further measures will go a little further in helping to extinguish the growing flames of public discontent about rising prices.

There is something in there for everybody, because the Government was anxious not to forget the so-called “squeezed-middle”.

The energy credit is to be doubled, a move that will ease some some of the burden on all households, while the cut in public transport fares will be of assistance to commuters and young people.

Those who most need assistance will benefit from the more targeted measures, like the enhancements to the drugs payment scheme.

But in reality, few (and least of all the opposition) will be completely satisfied with the package revealed by ministers.

The Government though is walking a tightrope on this one and it is wobbly.

Had it not given out anything extra in assistance, it would have faced a barrage of criticism from the opposition and voters alike.

But had it decided to go the whole hog, have a mini-budget and throw bucket loads of money at the problem, it would have stoked the flames even higher.

Inflation is a tricky phenomenon – consumers need more income to cope with the rising prices, through higher wages, lower taxes or increased supports.

But the more money they have to spend in the economy, the greater the likelihood that the problem will get worse not better, because their spending will increase demand and reduce supply.

So the Government and by extension we as consumers have to exercise great caution to ensure we don’t create an inflationary wage-price spiral over the coming months.

The added challenge though is that the main cause of this inflationary bubble is not one that the Government or anyone else here in Ireland can control.

Yes, consumers here who were fortunate enough to have been able to build savings during the period of pandemic restrictions are now spending them.

The latest Central Bank data published this week shows household savings declined by €300m between July and September, the second consecutive quarter that they dropped.

That spending splurge is also likely to continue as savings remain elevated compared to pre-pandemic levels and this won’t make the inflation situation any better.

Energy prices are key

But a far bigger factor is sky-high global energy prices, the consequence of a supply crunch arising from the pandemic and other disruption, which has made this a worldwide inflationary phenomenon, feeding through to everything from electricity prices to food production to manufactured goods.

Just yesterday, the European Commission published its latest forecasts, predicting inflation across the euro zone will peak at 4.8% this quarter and average out at 3.5% for the year.

While across the Atlantic it also emerged that in the 12 months to January, the US consumer price index jumped 7.5%, the biggest year-on-year increase since February 1982.

So as it stands on the wobbly tightrope, the Government must also do so without much in the way of assistance to help it balance.

Indeed, it can only hope that predictions that this inflationary spike will prove short lived are correct and that it will come to an end before it filters through any further to demands for higher wages that prompt a spiral.

Just yesterday, the European Central Bank’s (ECB) chief economist and Irishman, Philip Lane, reiterated his long-held view that the problem will be temporary.

Professor Lane wrote in a blog that he continues to believe that euro zone inflation will fall again as pandemic-related bottlenecks in goods as well as labour are resolved, without the requirement for “significant policy tightening” – ie, changes to ECB interest rates.

But not everyone believes the bank and pressure is growing on the ECB to follow the lead of the Bank of England and the path outlined by the US Federal Reserve, and raise rates.

Others though concur with the ECB’s analysis, because this inflationary episode in Europe has been largely caused by supply problems and not by excess demand like it has in the US.

As a result, the argument goes that increasing European interest rates in an effort to dampen demand won’t actually do much to solve the problem – only increasing supply will.

In that regard energy prices have shown signs of increased stability in recent weeks and the hope is that this might be followed by a decrease.

Therefore, an anxious wait faces the Government and the public.

High inflation is in not in anyone’s interests and nobody will want to go back to the bad old days of the 1980s.

And so, as uncomfortably wobbly as it might be, the Government must continue to carefully walk that tightrope.

Article Source – Government is walking wobbly tightrope on cost-of-living – RTE – Will Goodbody

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