Why is inflation increasing?

After years of muted price growth inflationary pressures are rapidly building up in the Irish economy.

According to the Central Statistics Office (CSO) prices rose by 7% in April. The fastest pace in 22 years. And according to the ESRI inflation is expected to hit over 8% in the coming months, which, if it comes to pass, would see prices rising at the fastest pace since the early 1980s.

And inflation isn’t just confined to Ireland. In the US it’s at a 41-year high of 8.5% and in the UK it’s forecast to reach over 10% by the end of the year. 

So why are prices on the rise? Where are prices increasing the most? And what impact might this have on the wider economy?

So why are prices increasing? 

One word. Energy.

Energy continues to be the main driver of inflation and there appears to be no end in sight to the record prices. 

And as we use energy to manufacture and produce almost everything, this then feeds through into higher prices in almost every other sector unfortunately. 

Last year there were over 35 price hike announcements from gas and electricity suppliers in Ireland and some suppliers raised their prices five times. And already in 2022 we’ve seen more hefty price hikes from almost all suppliers.

See here for an in-depth overview of why energy prices are increasing.  

Another reason for rising inflation is Covid. 

The pandemic forced many industries into lockdown for much of 2020 and early 2021 and this disrupted delicate global supply chains. So as restrictions eased and economies reopened, severe supply chain bottlenecks arose which put upward pressure on prices in industries everywhere. 

The energy market was badly affected but so was the production of things like micro-chips, which are used in everything from laptops and smartphones to cars and high-tech fridges. This then fed through into higher prices for these items.

Continued strict Covid lockdowns in China, which manufactures many of the world's goods, have slowed the return to normal.   

The pandemic also led to a huge increase in household savings as people had nowhere to spend. Savings reached a record high of over €136 billion in Ireland. But as everywhere has reopened, some of these savings have flooded back into the economy as consumers reopen their purse strings, which has put upward pressure on prices and also led to an increase in house prices in particular.  

Finally, closer to home, an increase in Brexit-related tariffs and charges, and an increase in the price of fertiliser on the back of soaring gas prices, is also driving up food inflation. As is the recent shortage of lorry drivers.  

Where are prices increasing the most?

As mentioned, energy is responsible for most of the recent uptick in inflation. Gas, electricity, home heating oil, and petrol and diesel are all at record highs.  

Electricity prices are up by almost 30% and natural gas by over 50% over the past year, according to the CSO. However, our own analysis of six of the main energy suppliers shows that some households have been hit with far higher increases over the past year or so. 

Meanwhile, petrol and diesel are both close to €2 a litre and are up over 35% over the past year.

Food inflation is the next big thing to worry about. At 3.5% it’s at its highest level in years and could reach close to 5% or more over the coming months. 

As recently as January 2021, food prices were falling by -2.1% according to the CSO so it’s a big turnaround in the space of just over a year.

However the conflict in Ukraine and its impact on the world’s supply of wheat could see prices for many staples skyrocket while trade sanctions on Russia, from whom we import over 20% of our fertiliser, will also put huge upward pressure on food prices. 

The impact of Minimum Unit Pricing on alcohol is also clearly being seen with beer up in price by over 11% and spirits up by almost 8%.

Streaming services are also going up. Netflix recently increased its basic package €1 to €8.99 a month. Its standard package rose by €2 to €14.99 a month while its premium subscription increased by €3, or almost 17%, to a fairly hefty €20.99 a month. 

While these may not seem like huge increases, and you could argue Netflix still provides excellent value for money, it's the second increase from the company in just under a year. In January of last year, its premium plan was only €15.99 a month for example. 

Meanwhile, mobile costs are going to shoot up. Three has said that it will increase the monthly charge on its billpay plans by 4.5% every year, starting from April, for new customers and those upgrading or signing new contracts. Vodafone increased its prices by 5.3% in April and has said it will increase prices by the rate of inflation in January plus 3% every year going forward!

In previous years, increases in rents, transport and health insurance were softened by falling prices in the food and clothing sectors. This is now no longer the case with price rises being seen in almost every sector across the board.   

We can postpone buying a new smartphone, a new car, and can cancel the foreign holiday if we come under financial pressure, but it’s very difficult for consumers to avoid price hikes in the food and energy sectors, which will make this year difficult for many households.

Amidst the increasing prices there are some small pieces of good news. Car insurance is down by over 10% as reforms aimed at tackling excessive personal injury payouts seem to be working. However it’s important that motorists still shop around. Insurers, just like every business, usually reserve their best deals for new customers and this is where most of the recent reductions in price will have taken place. Don’t just presume that by staying with the same insurer you’re going to see an automatic reduction of 10% or so in your premium.         

Impact

Rising prices will affect households differently. 

A renter who drives to work each day and likes the odd glass of wine in the evening and subscribes to Netflix is likely to have a very different rate of inflation to someone with no mortgage who cycles everywhere and only watches standard TV for example.

However, poorer households, which spend a disproportionate amount of their money on food and energy are likely to be particularly badly affected.

Interest rates, and therefore mortgage rates, are also likely to rise soon to help try tame inflation. 

Around this time last year, it was forecast that inflation would shoot higher over the coming year before quickly falling back, so there was little talk of a rise in interest rates.  

However no one expected inflation would go nearly as high or last quite so long.  

In other words, inflation now looks to be less ‘transitory’ or short-lived than previously forecast. 

For someone with €200,00 remaining on their tracker mortgage over 20 years – currently paying a margin of 1% – they’re looking at an increase in repayments of around €45 a month if the ECB raises rates by 0.50%.

If you’re an average first-time buyer borrowing €250,000 over 30 years at the average rate of 2.76% - a 0.50% increase would add around €70 a month to your repayments (if you’re on a variable rate).

See here for more information on whether interest rates might rise.

What to do about rising prices?

There are a few ways to beat the rising cost of living. 

Switching your bills to a cheaper provider on bonkers.ie is one way. While shopping better is another.

Check out our article here which gives 11 ways to beat rising inflation.

Get in touch

Are you worried about rising prices Have you noticed the price of things increasing of late? What do you think the government should do?

Get in touch in the comments below.