The unequal hit from inflation is going to be one of the big stories of the second half of this year. We are already seeing it, of course, with less well-off households getting squeezed by higher fuel prices. But the surge in energy prices will soon be joined by a serious bout of food price inflation, now brewing in supply chains. Energy and food form a much bigger part of spending for poorer households than for better-off ones, which also typically have more by way of spare cash to deal with the hit. This rift is growing. The State has some resources to deal with this, but the fight over how these should be deployed is only getting going.
We have already seen some pick-up in food prices. But much more is to come. The signals are there in food commodity prices and in stories from the frontline, where food suppliers are telling retailers that existing contracts are just not viable and primary producers are getting squeezed by higher costs for fertilizers and a whole range of other inputs.
Initial hopes that the general inflation surge might be temporary and easily dealt with now look misplaced. The fall-out from the war in Ukraine is leading to fundamental changes in energy and food markets and — combined with the ongoing supply chain problems from Covid-19 — threatens that inflation will stay higher for longer. The drum-beats about gas shortages next winter are worrying, threatening a knock-on also to electricity and fertilizer prices and problems for big, energy-using manufacturers.
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The good news, for now, is that forecasts for overall growth in the economy remain solid, meaning decent tax revenues and employment holding up. The ESRI this week cut its forecasts, but still sees growth in the domestic economy of almost 4.5 per cent this year and 3.7 per cent in 2023. This stands in contrast to increasing international fears of recessions. The ESRI does point to significant “downside risks” and for now we can only wait and see how things play out. Economic forecasts are now hugely reliant on the flow of gas from Russia and the ability to get grain out of Ukraine via the Black Sea or other routes.
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But even if the topline Irish economic figures hold in — buoyed by exports that happened during Covid shutdowns — there is trouble brewing under the surface. The post-lockdown surge in spending and in the housing market was like a valve being released. But many households are going to reassess when the holidays are over and energy, food and other bills are still going up, along with mortgage repayments.
There will surely be a pull-back in discretionary consumer spending in the second half of the year, even if many better-off households still have significant savings, boosted during the shutdowns. The impact of a world slow-down or recession — and the stock market collapse of the big US tech players — on the multinational sector is hard to call, but neither is a plus.
Will the government take any pre-budget action?
Underneath the topline figures, the price surge will have many households in trouble. Poorer households spend proportionately more on their incomes on food and energy. With mortgage rates also rising, the squeeze will extend beyond those on welfare to many lower- and even middle-income households. The pay increase to the highest-paid public servants will just underline the growing divide between those who have the financial resources to get through this and those who don’t. For some, it will mean fewer weekends away or meals out. For others, the choices will be a lot starker.
You would suspect the Government is holding out against further financial assistance before the budget because it wants to get a grip on how bad things could get over the winter. It wants to know what it is dealing with. Forecasts have rarely been so uncertain, partly because of the war but also because of how the balance between growth and inflation will work out. Some feel a sharp drop in growth may mean interest-rate rises have to stall heading into 2023.
By October we should know a bit more, though I am not sure the Government’s attempt to hold out until then will succeed. And from what Ministers are saying I don’t think they are sure either. They will face a key decision about how to frame the Summer Economic Statement — the key pre-budget document due in July. Tax revenues are way ahead of target this year, providing the scope to act either before the budget or immediately afterwards — in contrast to the usual practice where key changes happen in January.
The question is not what cash is available this year, it is what the public finances will be like in 2023 and 2024 and beyond. If, as Paschal Donohoe suggested this week at the National Economic Dialogue — the annual pre-budget talking shop — we have indeed entered a new economic era of lower growth and higher interest rates then it has implications for the outlook.
Managing the deeply unequal economic hit from the inflationary surge is the first job. The dialogue this week showed the problems — there were dozens of demands for extra cash and no suggestions of where more revenue could be raised. Everyone is eyeing the cash available this year — but no one is looking to the longer-term pressures on the public finances.
Tricky decisions lie ahead. The way rail union leader Mick Lynch is resonating in the UK in his interviews about how ordinary workers are taking the biggest hit and their interests are being ignored by the better-offs and policymakers is a warning for the Government here, too. There is a deep divide in now different households are now being affected and the Government’s response needs to reflect this. Maintaining some kind of social and political cohesion through this will be a big challenge.