On Thursday, the CSO released truly horrible inflation figures, showing that prices, as measured by the Consumer Price Index (CPI), rose 6.7 percent in the year to March. This was the highest CPI since November 2000.
Even more worryingly, there are clear signs the inflation rate is accelerating, with prices rising 1.9 percent in the last month alone.
Higher energy prices — crude oil prices are up 60 percent and natural gas prices have tripled over the past year — are the main cause, with transportation prices up a massive 18.7 percent, while prices for housing, water, electricity, gas and other fuels have plummeted (including household electricity and gas bills) rose 17.4 percent.
And the bad news is that there’s almost certainly a lot worse to come on this front.
ESRI now expects inflation to peak at around 8.5 percent in June and July, with full-year inflation averaging 6.7 percent before falling back to “just” 5 percent in 2023.
So how concerned should we be about rising inflation? Haven’t we been here before? Previous energy price spikes have led to temporary bouts of inflation that have fallen almost as quickly as commodity prices have fallen.
While we’ve all focused on what’s happening to energy prices, we’ve ignored food prices. Not for long, I suppose.
Figures compiled by the Irish Farmers’ Association show that wheat prices have risen 60 per cent in the last six months, while barley prices have risen 65 per cent and soybean prices have risen 50 per cent over the same period.
Those higher grain prices have yet to make themselves felt at the supermarket checkout, as the CSO’s calculation of grocery prices rose just 3.1 percent in the year to March. That will almost certainly change very quickly.
Together, Russia and Ukraine account for about a third of world wheat and barley exports. While most of these are winter crops – since the seed was planted last fall, what are the chances that much grain will be exported from these countries this year?
Even if the grain can be safely harvested in July and August, how can it be transported to and shipped from Odessa, the Ukrainian port from which most of this grain is exported?
Higher grain prices don’t just mean more expensive bread and pasta. It will also mean that the prices of all baked goods and processed foods that use grain as an ingredient will skyrocket. And it won’t just be foods that use grain as an ingredient that will be affected.
Cereals and soy are also very important animal feeds. This makes beef, pork, poultry, dairy and eggs more expensive.
It is this combination of higher energy and food prices that makes the current inflation spurt so potentially dangerous. Central bankers are very worried.
“After struggling to bring inflation to target for more than a decade, central banks now face the opposite problem. Inflation is back,” Bank for International Settlements (BIS, the Central Bank of Central Banks) director Agustín Carstens said last Tuesday.
“We should not expect inflationary pressures to abate any time soon, as many of the causes of high inflation remain and new ones emerge. There are already signs of increased price spillovers between sectors and between prices and wages, as is common in a high-inflation environment.”
Closer to home, our own central bank is also sounding the alarm about inflation. In its latest quarterly report, it forecast peak inflation at 8 percent and average inflation for this year at 6.5 percent.
A word of warning: central banks everywhere have a record of inflation forecasts that would make the boy who cried wolf blush.
Still, it feels different. Not only do we have a combination of rising food and energy prices, there is also the likely impact of Russian atrocities in Ukraine on Western public opinion.
EU countries have paid Russia €35 billion for energy since the invasion began. This is not a sustainable position. While some EU countries, notably Germany, resist calls for a total boycott of Russian energy, including natural gas, what happens if, God forbid, more atrocities are uncovered – Bucha wasn’t an isolated case?
It is much more likely that Europe will turn off the Russian energy taps sooner rather than later. Something that, even with the possible support of new Iranian and Venezuelan friends, will continue to drive up energy prices.
After Public Expenditure Secretary Michael McGrath vowed last weekend to “link up” with public sector unions, we are already seeing higher inflation translate into higher wage demands.
A wage-price spiral – with workers demanding higher wages to compensate for lower purchasing power, which in turn fuels further price increases and so on – now seems more likely than possible.
https://www.independent.ie/business/wage-price-spiral-now-seems-more-probable-than-possible-41535864.html The wage-price spiral now seems more likely than possible