Pressure on the government to counter the surge in living costs has been resisted. Measures already in place will cost € 2.4 billion for the full year and include electricity bill credits, supplementary social spending and excise tax cuts on automotive fuel.
The government does not want to provide further measures for the next four months, but hopes to wait until the October budget. The reason the government is having a hard time clarifying is that the Treasury doesn’t have the key to a treasure chest full of money.
The euro is a foreign currency like the US dollar for practical political purposes. If the Irish government tries to make a dollar, US authorities will oppose it.
Of course, if you can find them, you can borrow dollars or euros from voluntary lenders. The potential lender, the European Central Bank in Frankfurt, has just emerged from the sovereign debt market. The Federal Reserve System in Washington, the central bank of the United States, did the same.
These monetary authorities admit that inflation is dangerously high and that monetary policy tightening is too slow. Simple money funded a large budget deficit and helped avoid a sharp recession due to a pandemic. With more than expected recovery, inflation soaring, monetary authorities have begun to reverse the engine.
Last summer, the central bank expected new inflation to be a temporary blip. This wasn’t completely fancy, but it proved to be wide.
Recent rises in interest rates and monetary tightening measures, if implemented earlier, will weaken inflation expectations. The current risk is that even tighter refinements will be needed to contain the expected-driven wage price spiral that has already begun.
Estimates from surveys on inflation expectations of European consumers and businesses have risen sharply in recent months and can be self-fulfilling.
Inflation rates are largely determined externally in countries with fixed exchange rates or no currency at all (as in the case of Eurozone member countries). If consumer prices rise faster than the official 2pc target, consumer prices tend to rise faster in all countries that share a common currency.
According to the latest figures, Irish consumer prices are 8.3% higher than they were a year ago, but are up 8.1% across the euro area. In the future, Irish inflation will follow the patterns established throughout the zone, as it has been since the independent Irish currency was abandoned in 1999.
Anyone who wants the government to do something to reverse the inflation surge should turn to the ECB for advice. The ECB’s mission is to return to its unchanged inflation target of 2pc. However, they don’t need their advice. The ECB has already announced an increase in short-term interest rates and has begun to withdraw its intervention in the bond market, which kept government borrowing costs down.
It is unlikely that the 2pc target will be relaxed. The ECB has policy tools to make that happen and they are starting to use them. In other words, inflation will eventually return to 2%. (It is worth remembering that the ECB, and other central banks with similar goals, have been widely successful in achieving these goals over the last two decades.)
Meanwhile, governments are facing demands to compensate groups of societies suffering from inflation above their targets, and it is important to identify options open to those groups and governments.
Despite constant claims against it, Ireland’s surge in inflation has not yet manifested itself in rising food prices. CSO figures show that two-thirds of the overall price increase over the past year is due to the energy sector.
Within the overall index (8.3% ahead in 12 months), transportation increased by 17% and the gas / electricity / fuel category increased by 25%. Food has risen 4.4%, well below the overall percentage. Of course, that’s unwelcome, but it’s not enough to justify the apocalyptic story that “a struggling family can’t put food on the table.”
Immediate means of exaggeration have become a currency of political debate and are reflected in the mainstream media. Don’t worry about Twitter. An experienced journalist of my acquaintance claims that his visit to Lidl now costs € 100, compared to € 60 a year ago. He must be gassing the trolley.
Governments can redistribute the burden of changing consumer price conditions, even if the ECB has to leave the main battle to the ECB. They chose to reduce taxes on some energy products, primarily because it is possible — at least in Europe, tax rates are high, but food does not attract high taxes in these areas (for example). No VAT) —Therefore, there is no clear policy tool to get.
The low-income group spends much of their budget on food and much less on items whose costs are supported by excise tax cuts such as gasoline and diesel. Without tax cuts, these prices would rise even faster, and the advice from economists was to limit budgetary measures to targeted support for the most vulnerable groups.
There are two motives for this approach. The first is the futileness of trying to curb general inflation through national budgetary measures. No country can segregate all groups of society if the cost of important imports rises so sharply. Second, there is no magical money tree and extra borrowing is risky. This is especially true for governments that already have large amounts of legacy debt.
Everything that can be carefully added to the debt pile should be carefully allocated. This will prioritize Means test social benefits over additional reductions in vehicle taxes and increased salaries for public services.