• Irish consumer prices rise by 7.8%, the fastest pace in 38 years.
• Higher heating and light costs the main culprit
• Food prices also moving onto faster trend increases
• Peak may be close but any pull-back will be slow
• Case for two-pronged fiscal measures becoming more urgent
• Separate surprising increase in household savings suggests Irish consumers cutting back spending on fear rather than strained finances! 

Largely reflecting global forces, Irish inflation continued to climb rapidly in May, reaching 7.8%, the highest level since August 1984 (+8.0%) and showing a marked increase from 7.0% in April.

Some sense of the extreme nature of current pressures is shown in the graph below. As the median age of the Irish population is just under 38 years, most won’t remember the degree of damage done to the Irish economy by surging energy costs and poor domestic policymaking four decades ago.

A clear sense of the explosive increase in living costs of late is provided by a comparison of the May 2022 inflation reading of  with that of May 2021 when inflation was just 1.7%. Moreover, the sharpest increases are being seen in the costs of everyday essentials rather than items where the typical consumer may have scope to cut back spending.

The main factor behind the acceleration in Irish inflation in the past month was a further sharp uplift in the cost of electricity, gas and home heating oils which rose 9.8% month-on-month to stand 56.7% higher than a year earlier. This represents a further marked rise from the 45.2% increase in April.>

There was also a marked uptick in food price inflation to 4.5% y/y from 3.5% in April. The pick-up in food price pressures of late is more clearly seen in the annualised increase seen over the past three months which is now running at 10.8%. As has been the case recently, these pressures are most clearly evident in the cost of staples such as bread (+8.8%y/y), pasta (+11.7% y/y), meat (+7.5% y/y),milk (+10.5%y/y) and butter and cooking oils (+12.2%).

Beyond, these areas, there was a slight easing in the rate of transport inflation from 18.9% y/y in April to 16.5%y/y in May. However, this was largely because of a likely temporary 30.1% month-on- month fall in airfares. In contrast, inflation in motor fuels edged up from 31.6% y/y to 33.4% y/y and will likely further boost inflation figures in coming months.

Beyond the eye-watering increases in energy and food costs, the inflation picture is more mixed but there are signs of a pick-up in several areas such as clothing (+3.8%y/y in May against 2.0% in April), accommodation (+21.9% y/y in May against +19.9% in April), in private rents (+11.2% y/y against 9.3%) previously as well as some items likely affected by global supply chain issues such as materials for home repairs (+13.5% y/y), car prices (+13.2%y/y) and major household appliances (+8.8% y/y) although prices continue to fall for electronic equipment  (-2.6%y/y).      

Where next? 

With fuel prices moving even higher in early June and knock-on impacts of higher transport costs and global supply problems yet to be fully seen, the likelihood is that Irish inflation has not yet peaked. It seems probable that headline inflation could push close to 9% and might even threaten 10% depending on the vagaries of global energy markets.

More significantly, the current degree of pressure on costs in areas such as energy and food, together with spill-over effects into other areas including an expected sequence of mortgage rate increases,  mean that any pull-back from a near term peak through late 2022 and into 2023 is likely to be modest and may be slow to materialise in any meaningful way.

What can be done?

As we and many others have relatedly indicated, the Irish government cannot and should not attempt to insulate the Irish economy from energy-driven inflation. Importantly, however, it should seek to limit the damage to those most vulnerable to surging living costs. In that regard, the particularly severe price pressures seen in energy and food require further significant offsetting measures,

In addition the Government has try to limit more enduring inflation damage to the Irish economy by implementing measures that lessen the risk of a wage cost spiral. In that respect, indications of measures to address costs in areas such as childcare, and public transport, coupled with signaling in regard to some measure of indexation in regard to social welfare rates and income taxes in the upcoming Budget represent appropriate forms of fiscal policy response.

The current robust health of the public finances allows for substantial action in this regard. The delicate balance is to implement specific measures that are sufficiently strong to make a difference to living and business costs but are also clearly targeted and structured in a manner that avoids any suggestion that inflation might now be set on a lasting path of 5% or higher. Later today, the ECB is set to announce tough measures that will put it on a policy path intended to will push Euro area inflation back towards 2%. Any fiscal measures announced by the Irish government in coming months must clearly signal that Irish costs will develop in a manner entirely consistent with such a trajectory.   

Are Irish households financially strained or just scared?

Separately today, the CSO published an estimate of household saving for Q1 2022. Surprisingly, this shows an increase to 19.1% from 15.8% in the final quarter of 2021. The latest number is nearly twice the average figure of 10.4% seen between 2010 and 2019.

It seems counterintuitive that in circumstances where the aggregate incomes of Irish households remained on a solid trajectory that consumers responded to higher prices for essentials by dramatically curbing their overall spending.

Clearly uncertainty regarding war in Ukraine would have caused some precautionary pull-back as suggested by responses to the KBC Bank consumer sentiment survey in recent months. However, that survey also signaled increasing strains on household finances rather than a fear-based build-up in savings.  While it is true that in the past Irish consumers have typically saved more on ‘rainy days’,  we find it surprising that savings increased so sharply in early 2022.