The market can handle rising prices – but not if people think they’re being ripped off

There are many reasons why the prices of electricity, groceries, garbage collection and just about everything else are rising. We all know the reasons and even understand them. However, the reasons do not always explain the extent of the price increases.

Consumer businesses across the country are at risk of driving up inflation and weakening the economy over the long term by using higher input cost coverage to price customers.

It’s short-term thinking and can ultimately backfire if things slow down as consumers are forced to tighten their belts, change their buying patterns and simply buy less.

Let me give the companies the leap of faith for a moment. We are an island so anything imported has to be shipped or flown in. We have a relatively small population so the economies of scale of selling to tens of millions of people simply don’t exist in the Irish market.

We have fairly good social and employment protections, which means extra costs for employers.

This doesn’t explain why we have the second highest food prices in the eurozone and the third highest in the EU, especially if you look at local produce like milk, cheese and eggs, which have recently been 25 per cent above the EU average Opinion poll.

There are not many shipping, flight or transport costs. Bread and cereals were 20 percent more expensive than the EU average.

Somehow Irish companies manage to produce these goods at home and they form important ingredients for the export of dairy and other food products that are shipped around the world at affordable prices. Yet Irish consumers end up paying so much for it.

Take the higher energy costs. Every country has experienced a huge increase in energy costs in the last year or more. Nevertheless, in Ireland we pay some of the highest electricity grid connection costs in Europe. It’s not at all clear why.

On the employment front, we have observed greater casualization of employment practices in parts of the food processing industry. Certainly this should have reduced production costs, which should be reflected in the price of the end product.

It’s no secret that executives at a major food retailer used to call Ireland a ‘Treasure Island’ because of the margins they were able to achieve here.

The problem with price gouging is that you can feel it in your bones, but each company along the supply chain blames the other for price increases and higher profit margins.

The food manufacturers blame the supermarket chains for this. Service providers blame fuel prices. Petrol station operators blame world markets or dealers.

One way to sift through the facts to determine who is cheating who is to look at the earnings of companies along the supply chain in a particular sector.

But that’s not easy. We have some of the best protections out there to help businesses override their underlying margins. We have the use of unlimited liability companies that do not require accounts to be filed publicly. We have multinational companies that only submit group accounts covering all international operations.

The truth is that the Irish economy is not good at being open about how much money it makes, and this is made easier by the business culture and attractions of what Enda Kenny used to call ‘the best little country in the world’ Make transactions”.

Fuel prices have skyrocketed and we can all see that. I know a waste collection company that increased their prices by 20 percent in March. This company has no competitors in its field and blamed the price increase on higher fuel costs.

However, fuel accounts for part of the company’s overall costs. A 20 percent increase in prices increases revenue by 20 percent. If fuel isn’t a large percentage of spending, these numbers won’t add up.

We’ve seen it with hotels, some charging 400 or 500 euros a night, particularly in Dublin. The reality is they charge these prices on certain nights because they can. If they can’t find enough people to pay the installments, they have to lower the rates.

You would say the market decides the price. The market often has to set the price, but there are times when a sector just doesn’t offer value for money.

When that happens, everyone gets in trouble. This is exactly what happened at the end of the last boom. Before the big crash came, people had a clear feeling that they were being ripped off.

Restaurants, hotels, bars… they all charged what the market could take – until the crash came and the market couldn’t take it anymore.

Our tourism industry became greedy and we became uncompetitive.

After the crash, something extraordinary happened. Consumers had less money and people suffered tremendous financial pain. The industry had to reprice itself. The hospitality industry in Ireland has done an excellent job of rediscovering the whole concept of value for money.

It had to be more resourceful and work harder to get customers to the door. Ireland became a better value destination and tourism boomed.

At the height of the last boom, we had 7.7 million international tourists. After rebuilding after the crash, that number had reached 8.7 million by 2016 and 11.3 million in 2019.

Those numbers collapsed during Covid and we have no hope of rebuilding them if the industry forces itself out of the market.

Asking what the market can bear is a fundamental principle in business. It can be wonderful in the short term, but if it means abandoning the notion of value for money, it will only succeed in the short term.

Soon the market can’t take it anymore and companies can’t handle it anymore.

With so much uncertainty, companies need to think a little longer term.