You don’t need to pore over the raw economic data to know that the cost of living is rising. We can all feel it in our pockets and see it on our energy bills. Prices are going up, and purchasing power is going down. We all feel a little poorer.
But the economic data is striking, nonetheless. Inflation has averaged just 1.7 per cent since the formation of the euro in 2002. In fact, it had never gone higher than 4.1 per cent. Last month, inflation reached 7.4 per cent.
It is a problem across Europe, and it is a problem here in Ireland too. Figures from the Central Statistics Office (CSO), published on Thursday, show the annual rate of price growth in the Irish economy rose to 7 per cent in April. To put this into context, the figure is a 22-year high.
The CSO’s Consumer Price Index (CPI) highlighted a broad-based price rise across the Irish economy, particularly across energy, fuel and grocery prices.
Things could get worse. In its latest quarterly bulletin, the Economic and Social Research Institute (ESRI) predicted the headline rate of inflation will rise to 8.5 per cent or higher in the coming months, a level not seen since the early 1980s. The think-tank pointed out that the war in Ukraine compounds existing price pressures but it did say that the inflation figure would level out at 6.7 per cent for the year as a whole.
In its March bulletin, the ESRI said that incomes – in real terms – will fall by an average of 2 per cent this year. For a typical household, that means a real income decline by about €1,300 once the effects of inflation are accounted for.
It raises significant questions for policymakers around the world. If they want to tackle inflation, they run the risk of a recession (incidentally, many leading economists, including the chief economist of the IMF, say a global recession is imminent anyway).
So, just what happens next?
Last week, we published three significant pieces on the issue of inflation and stagflation, a pretty grim vista where prices rise while growth slows down.
Constantin examined it from the US perspective. His point was simple: The US economy is riddled with inflation and the only cure is a recession. Having studied the US GDP data, Constantin argued that the US economy is deeply sick, leaving the Fed with very few good options.
Many in the US argued that the US economy was so healthy that it was overheating, and that inflation should start abating once improvements in productive capacity take hold. Constantin was not convinced, arguing that a more concerning version of the same data is that the economy as a whole is losing competitiveness and growth momentum.
And this is troubling. Constantin teased out why, looking at the current structure of the US economy. The supply side of that economy is so stressed that its production side is losing competitiveness and markets, while the demand side of the economy is still running red-hot amidst almost unprecedented cost pressures.
He wrote: “This means wage pressure is here to stay, pushing higher producer costs, but also consumer prices, as higher wages inflation translates into higher labour earnings and feeds greater demand for goods and services. Couple this with a pandemic-period accumulated $2 trillion in household savings, and we have a perfect explanation as to the true sources of inflation, plus better visibility of what we can rationally expect from inflation into the near future.”
Sean continued the theme of inflation but looked at it through the perspective of the ECB. He summed up the dilemma facing the bank: “The ECB will annoy people no matter what it does. Tighten, and it could crash the economy. Fail to tighten, and record-high inflation could get embedded.”
Sean explained that the ECB can reduce the total amount of spending in the economy raising interest rates. However, there was a caveat: Not all prices come from within the European economy. So central bankers need to distinguish the inflation that comes from within the economy from the inflation coming from outside it.
The question, he says, is how aggressively they will tighten: “If what we’re seeing is a consequence of the Ukraine war, the correct response from the ECB is to hold tight. Firstly, because the ECB can’t control imported energy prices. And secondly, because energy prices have stepped up. They’re a once-off, inflation-wise. Not a source of consistent inflation, year-in-year-out.”
Stephen, meanwhile, looked at the politics of inflation, arguing that the tool we have to fight inflation – central bank-led monetary policy – does so at the expense of employment.
He argued passionately that the politics of inflation are sadly all too clear, and that they are not working in workers’ favour. “Inflation will be kept at bay with interest rate rises, which will slow economic growth and lead to impoverished workers,” he said.
While we are on high alert on inflation, Stephen went further and examined what stagflation would mean for Ireland. The answer, in short, is not good.
He wrote: “The average person does not compute the rate of GDP growth; they feel like things are getting better for them and for their family. A little more in the bank each week. More stuff for the kids. Maybe a holiday, or an extra holiday. A bargain. A new toy, a new gadget, perhaps a new car. Stagflation does away with all of those nice things. You can expect things to get slightly shittier more regularly. That’s how it felt to live through it in the 70s. If you need a cultural touchstone, listen again to Born to Run and The River by Bruce Springsteen.”
This is a topic and an issue that is not going away. And it is one we will, sadly, be returning to again and again.
Elsewhere last week, we published a major feature on how An Bord Pleanála got stuck between ministers, local authorities, judges and developers. Francesca explained how public trust has been eroded in An Bord Pleanála due to unimplemented institutional reforms, controversial government housing policies and relentless legal challenges. Now, as a senior official temporarily steps aside, she wrote that it faces a potential crisis.
On Monday, we reported that the Irish whiskey-start up Natterjack had sought the appointment of an examiner, weeks after a backer sought to appoint a receiver. On Tuesday, its founder Aidan Mehigan spoke about the decision to seek bankruptcy protection for his business. “The other creditors want the business to keep going and we are paying down our debts,” Mehigan told Dion. “Things were in a good place prior to this. I was feeling optimistic, but that’s what starting a business is, you feel optimistic on a Monday and get a kick in the balls on a Tuesday.”
As one company enters an examinership, it seems another is emerging from the process. Premier Periclase, a magnesium manufacturing plant in Co Louth currently in examinership that employs 94 people, has found new investors, but there will be pain for unsecured creditors, who are being asked to write off 90 per cent of their debts. Tom had the details.
All multinationals in Ireland use intercompany debt. Last week, Thomas explained that a €25 million tax battle has just decided what happens when they unwind it. Meanwhile, I spoke to Niall Cody, the chairman of the Revenue Commissioners, who talked about corporation tax, Covid supports and weeding out tax avoidance.