The Government is facing a tricky issue in dealing with the rise in the cost of living, with the key challenge being how to direct help to the households that need it most.
As these households fall into a few different groups, this is not easy. Every household has its own circumstances and its own personal inflation rate. And as Ireland is one of the more costly places to live in the European Union, many budgets are already stretched.
The impact of inflation on a household depends on two things. One is the level of income. Less well-off households have limited leeway in their weekly budgets and so can be pushed quickly into difficulty.
A key – and unknowable question – is how long inflationary pressures will last
The second is the spending pattern of the household.The nature of the surge in inflation is putting pressure on less well-off households. This is because inflation is hitting some goods and services that are “essentials”, such as the cost of heating a home, filling a car with petrol or, more recently, the price of a supermarket basket.
Less well-off households spend a higher proportion of their income in these areas for the simple reason that those with more money have more to spare for non-essentials.
The worry now for Government is that inflation is spreading – having started largely as a rise in energy prices, it is now affecting more goods and services, even if energy costs remain the standout.
And it looks like the inflation rate might remain relatively high for some time – ESRI director Dr Alan Barrett, talking on RTÉ's Morning Ireland on Monday, pointed out that Taoiseach Micheál Martin's comment to inflation now being a medium-term problem was potentially really significant.
The Central Statistics Office does not calculate inflation rates for different income groups . An experimental exercise in the UK showed roughly similar inflation rates for higher- versus lower-income houses since 2014, but big increases in household energy bills due in April under the UK’s price cap system will hit poorer households hard.
Pressures
Energy costs are the key pressure in Ireland too, of course. The latest Irish inflation figures show the cost of home energy running 27.4 per cent higher in December than one year earlier – and home heating oil is up by more than 50 per cent. The cost of filling a tank with petrol or diesel is up by about a third – a big issue for lower-income households in rural areas without public transport links.
However, wider price pressures are now evident too, albeit not on the same scale. Food prices have started to rise, increasing by 0.7 per cent in December alone with increases in staples such as bread and cereals. Kantar estimates annual grocery price inflation is now 1.7 per cent. The price of cars has also risen, as has the cost furniture, a lot of building materials and household appliances.
There are a complex range of reasons here, from supply chain problems relating to Covid and Brexit costs. The concern is that higher inflation could become embedded as wages follow prices and business and consumer expectations change.
The immediate political pressure relates to energy costs. The rise in home heating costs will push more people into fuel poverty – when households cannot afford to keep warm or must make unreasonable sacrifices in other areas to do so. Estimates suggest that 230,000 to 250,000 Irish households are already in this position and ESRI research has shown how increasing fuel prices can quickly push this number higher.
The Government has already increased the fuel allowance, paid to about 364,000 households, and tweaked eligibility – and further moves look certain here as part of its latest package. Extending the payment to those on Working Family Payments – low-income working people – could also be considered.
These are the the most targeted ways to address the specific problem of higher energy costs, though the Government may want some of the changes to be temporary or one-off, depending on how prices go. Supporting retrofitting also makes sense as a long-term measure to cut heating bills, as well as cutting emissions.
However, targeting short-term help at lower- to middle-income working households is difficult. So as well as possibly increasing the €100 energy credit, the Government is examining cutting other bills under its control, such as those associated with healthcare or public transport, or perhaps tweaking tax credits.
There are blunter instruments – and Ministers appear to want to avoid a mini-budget and any general increase in social welfare rates, or significant tax changes. A VAT cut on fuel has also been ruled out and carbon tax increases are to go ahead.
A key – and unknowable question – is how long inflationary pressures will last. Dealing with a temporary surge is one thing, while reacting to a longer-term rise in the inflation rate offers much more significant challenges. As Dr Barrett of the ESRI pointed out, permanently higher inflation creates new pressures in relation to increases in annual social welfare rates, tax credits and bands and public sector wages.If inflation is back to stay, what we are now seeing is only the start of the debate.
