Many young families, even those with two incomes, are still financially pressed, struggling to juggle the bills each month. But how is this the case with inflation now falling and wages on the rise? Surely the cost-of-living crisis is drawing to a close and people should be feeling that things are a bit easier? In many cases, yes, but there are reasons why many households in Ireland are still feeling the pinch.
Inflation has fallen, but many prices remain high
The rate of inflation has, encouragingly, dropped sharply, with the annual increase in the Irish consumer price index now running at 2.2 per cent, compared to a peak of 9.2 per cent in October 2022. However this just means in many cases that prices on average have stopped increasing as fast, not that they have actually fallen back. Household energy bills have, of course declined and may fall some more – though events in the Middle East are a risk here. But the increase in other household bills during the cost-of-living crisis have generally not been reversed and in some cases knock-on impacts are still being seen.
The latest quarterly commentary from the Economic and Social Research Institute (ESRI) analysed movements in real wages – in other words average earnings adjusted for inflation. These dropped sharply in 2022-2023, with real wages dropping by about 6.5 per cent. A reversal is under way this year as wages rise and inflation falls, but it could be 2026 before inflation-adjusted wages return on average to pre-Covid levels.
In reality, the spending power of households has been cushioned by once-off supports from the Government – energy credits, double child benefit weeks and so on. These have protected lower earners and also helped all households. But the issue for households, as these payments run out and they await to see what will happen in October’s budget, is that on average real earnings remain below where they were before the cost-of-living crisis. In inflationary times in the past, these kind of swings were common enough, but households got used to a long period of very low inflation from after the financial crisis.
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Prices are high in Ireland anyway
Ireland is an expensive place to live as it is. The latest figures from the EU statistical agency Eurostat shows Ireland in second place in the most expensive countries list. Irish prices are 41.8 per cent above the EU average, just exceeded by Denmark, at 43.4 per cent. It is little consolation that non-EU countries Switzerland (74 per cent above the average) and Iceland (56 per cent) are higher. The EU average is pulled down by lower prices in less well-off countries in eastern Europe, but it is notable that prices in France and Germany are around 10 per cent above the EU average, well below Ireland. Among the most expensive items here are alcoholic drinks, with prices here twice the EU average, due in large part to taxes. Meanwhile clothing prices here are slightly below the EU average.
For some years now these high price levels have put the squeeze on the spending power of Irish households. For some younger families, rental costs are a key part of this equation, with rental costs in Irish cities high and ESRI research showing that families who do not qualify for rental supports typically pay a higher proportion of their income in rent than elsewhere in the EU. Rental inflation in Ireland is also particularly high, hitting new tenancies and meaning many cannot afford to move from existing properties where increases are covered by rental pressure zone rules.
Some are seeing big increases in monthly mortgage repayments
Home ownership is expensive in Ireland, too. During the sharp rise in interest rates, much of the focus was on the generally older group of tracker mortgage holders who were getting hit automatically each month as the European Central Bank pushed up borrowing costs. However, many younger, more recent buyers with larger outstanding mortgage balances are also being affected as fixed rate deals they entered in to when they took out their mortgage run out and they are forced to refinance at higher rates.
Typically borrowers who fixed for three to five years before interest rates started to go up would have done so at interest rates of 2.5 to 2.75 per cent. Many who have rolled off fixed rate loans refixed at rates of 4 to 4.75 per cent – or even higher in some cases. While the additional bill would depend on a range of factors, many have faced monthly rises in repayments of €200 to €250. Fixed rate offers have, in recent months, started to come down a bit, though progress is slow and costs remain high for many with homes with poorer BER ratings. Some wisely decided to move to a variable rate for a period and can now take advantage of somewhat lower fixed rates – with the hope of further decreases moving into 2025.
Around 70,000 to 75,000 borrowers are due to finish a fixed rate term this year, so the number of households is significant.
Other pressure points
Related largely to Ireland’s status as a high cost country, young families have a range of other pressure points on their incomes. The most obvious is childcare where, despite increased Government subsidies, costs are still running at over €1,000 a month in and around Dublin, or higher in more expensive areas. There is much debate in the sector about the structure of Government assistance and its scale and whether providers should be allowed to increase fees to account for rising costs, particularly wages. Those who signed up to a Government National Childcare Scheme of subsidies committed to freeze fees. What is done here will be an interesting part of the budget, with indications that the Government may allow some fee increase to match the annual subsidy increase. Whatever happens, childcare costs reflect in part the high cost of operating anything in Ireland and also the fact that only in recent years has significant Government resources been directed in. Meanwhile energy costs, while they have fallen from their highs, remain higher than before the crisis broke.
The policy dilemma
The ongoing pressures on young families provides something of a dilemma for the Government in the budget. Ongoing supports in areas like childcare are a given, even if the level and shape needs to be decided. But since 2022 the Government has also supported households with a range of once-off payments – energy credits, double child benefit weeks, additional double welfare weeks and a range of special payments aimed at areas of particular need. The universal payments – particularly the energy credits, are not surprisingly the most expensive for the exchequer. Over last winter, for example, a family with two children would have received €450 in energy credits – three credits of €150 each – and an additional child benefit payment of €280, paid last December. This totals to €730. Those who qualified for other payments, such as the working family payment for lower earners, will have received more.
The dilemma for the Government, as inflation falls, is whether to make these “once-off” cash payments again. The advantage is that this does not involve an ongoing commitment for the exchequer. The disadvantage is the cost and the fact that once-offs are really just papering over the cracks rather than addressing fundamental issues. Also, the universal payments such as energy credits go to all households, so they not only benefit lower earners and the squeezed middle but also all households, including many who have a comfortable standard of living. All the indications are that the Coalition will “go again” with a cost-of-living package with payments to be made in the final months of this year, but the shape of it still has to be decided.
