Opinion: The government’s temporary measures are doing nothing to tame inflation

Opinion: The government’s temporary measures are doing nothing to tame inflation

IN NORMAL TIMES, January sales for things like clothing and air fares are enough to bring down the price of an average consumer’s monthly shopping basket. January 2021 was very far from normal, of course, and prices ticked up slightly that month. 

With the Omicron wave of the pandemic beginning to ebb, this year we are seeing a return to normality. Consumer prices fell -0.4% last month. This brought the annual inflation rate down to 5.0%, from the 5.5% registered in December. The last time inflation was that high, in April 2001, we were still using old money, punts and pence.

So, are we past the worst?

The good news is that, so far, rising inflation in Ireland has not been broad-based. Although supply issues have impacted on home rentals, and on some goods like cars and furniture, price rises have been largely confined to oil, gas and the sectors that depend on these energy inputs (transport, electricity). 

Having collapsed in the early days of the pandemic, oil prices have quadrupled to close in on $100 a barrel for the first time since 2014. The run up in European gas prices over the same period has been even more dramatic. While energy prices remain sensitive to geopolitical risks, it is highly unlikely we will see increases over the coming year on a par with those seen over the past 18 months. This should mean less upward pressure on the annual inflation rate.

The bad news is that energy prices may remain at high levels, and they tend to make up a bigger share of the monthly spend of lower-income households. This is causing real hardship for many families, and deepening inequality. So, the government’s recent half billion euro attempt to cushion the blow appears understandable at first glance. 

Firstly, reducing public transport fares by a fifth, and reducing the cap on school transport fees, will make a meaningful difference for families who already depend on these services while encouraging others to leave the car at home. But, there had not been any significant recent increase in fares, while reducing them does little to help those for whom public transport is not a realistic option. 

Secondly, the €200 energy rebate to be paid in April will benefit nearly every household. It may not be well targeted, but households will at least get the same benefit, irrespective of their income or electricity use (since any unused part can be carried forward to the following year).

Meanwhile, the extra €125 lump sum for those receiving the fuel allowance will be targeted at these largely low-income households. Unfortunately, however, these one-off benefits will only partially offset higher fuel costs.

Ireland as an outlier

Looking ahead, the inflation rate is widely expected to peak in the early months of this year before falling back over the following 18 months or so towards the levels around 2% that we had become accustomed to. While I expect this pattern to play out, the risks appear to be skewed towards inflation staying higher for longer than is currently anticipated.

Like economists, ordinary people tend to pay most attention to price changes. They start to worry when inflation accelerates. But, what is most striking are the high price levels in Ireland. Our cost of living is much higher than in neighboring countries, even when different wage levels are considered. 

In Ireland, for example, borrowers pay far higher interest rates on mortgages and other loans while insurance premiums, drug prices, legal and childcare fees remain extraordinarily high. Regressive indirect taxes like VAT, excise and the carbon tax are also relatively high here, feeding directly into high price levels.

These high prices may not explain the inflation we are seeing now, but rather reflect past inflation. They nonetheless weigh heavily on family budgets.

The government is right to say that recent rising prices are a global phenomenon, largely outside its control. But, they do have power to bring down some price levels, which would in turn dampen the inflation rate.

While competition is properly understood as a private sector phenomenon, government sets the rules of the game. In recent years they have dropped the ball on reforms that could meaningfully reduce costs in the childcare, legal and insurance sectors, for example. Obviously, government also sets tax rates and, in some sectors (banking, electricity, transport), state or semi-state businesses are key players.

Not doing the dog work

When it comes to tackling high prices, Irish governments have a terrible habit of introducing schemes that put money back in people’s pockets after the fact rather than tackling the root cause of high prices. The energy rebate and childcare subsidies fall into this category, as do ‘Help to Buy’ and the Housing Assistance Payment in the property sector. 

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Another good example is the recently announced €20 reduction in the monthly Drug Payment Scheme threshold. This will no doubt be welcomed by its 70,000 recipients. While the prices of medicines are high, however, they have not been a recent source of inflation.

Much more could be done to bring down drug prices more broadly by improving our uptake of cheaper generic drugs and by engaging proactively with drug companies on their price benchmarks.

Politically speaking, using part of the unexpectedly high tax receipts from the back end of 2021 to drop half a billion euro on eye-catching, once-off measures is far easier than doing the dog work of taking on the vested interests in big pharma, the legal profession or financial services.

Taking this easy way out ticks the box of looking like you’re doing something, but really does nothing to tame inflation in the short run nor address our high cost of living in the long run.

Victor Duggan is an economist.

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