Since autumn 2021 we have seen a return to rates of inflation not seen for 30 years.
This has caused big disruption, has impoverished people on low fixed incomes and necessitated much tougher behaviour by central banks. There are widespread concerns that some companies are profiting unduly from the rapid rise in prices.
While the surge in energy prices, driven by the war in Ukraine, has fallen back from its peak last year, the cost of energy remains much higher than it was in 2019, before the pandemic and Russia’s invasion.
It is clear that producers of fossil fuels, especially gas, have profited greatly from this unexpected acceleration in prices. (Our only home-grown beneficiary is the owner of the Corrib gasfield as Ireland imports most of our fossil fuels). Hence many countries are imposing taxes on this windfall gain.
Irish consumers have experienced an exceptional rise in electricity, gas and oil prices over the last 18 months. Across the EU27, the average increase in energy prices by 2022 was 50 per cent compared with pre-pandemic levels – for Ireland it was 63 per cent. However, some European Union partners suffered an even bigger hit, with energy prices in Italy, the Netherlands and Estonia up more than 100 per cent compared with 2019.
One factor contributing to Ireland’s above-average price rise was our dependence on gas for electricity generation. Germany, which used more coal, and France, which has large-scale nuclear generation, saw smaller price rises.
Without forward purchases by energy companies, things could have been much worse last autumn. However, like buying insurance, there is a price for such precautionary behaviour
While energy prices are now on the way down, there is widespread concern in Ireland that electricity companies are too slow to cut their prices, and thus potentially reaping excessive profits. While difficult to assess directly, the evidence from the import price of gas into Ireland suggests that what we are seeing is the effect of companies buying their gas months ahead, to hedge against even more excessive price rises.
It is clear from the import price data for 2021 and 2022 that Irish consumers benefited very significantly from this forward buying. Again comparing 2022 prices with those in 2019, the wholesale gas price in Europe rose by an average 740 per cent, while the increase in the Irish import price for gas was 320 per cent.
Without forward purchases by energy companies, things could have been much worse last autumn. However, like buying insurance, there is a price for such precautionary behaviour. In February this year the wholesale gas price in the EU was up 280 per cent on 2019, while Irish import prices were still up 360 per cent. However, as longer-term contracts run out there should be a significant fall in energy prices in Ireland later this year.
To some extent the public’s attention has now focused on the continuing high rate of inflation in food prices. Obviously, this is of particular concern for those on low incomes.
While it may not be reassuring to those who are suffering severely from food price inflation, it is notable that food prices have risen less in Ireland than in much of the rest of the EU.
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In 2022 food prices in Ireland were, on average, just over 10 per cent higher than in 2019, whereas for the EU as a whole they were 17 per cent higher, and close to 20 per cent higher in Germany.
Surprisingly, in Ireland fruit and vegetable prices were very similar to what they had been three years previously, whereas across the EU they were up about 15 per cent.
One of the factors underlying Ireland’s higher food price level is the isolated nature of the market. It is difficult for continental EU firms to enter and compete here and, post-Brexit, it is more difficult for UK firms to compete
The rise in bread and meat prices was also less than half the rate of inflation seen elsewhere in the EU. To some extent the lower rate of inflation reflects the fact that food prices in Ireland in 2019 were already among the highest in the EU. However, this gap has clearly narrowed over the last three years.
One of the factors underlying Ireland’s higher food price level is the isolated nature of the market. It is difficult for continental EU firms to enter and compete here and, post-Brexit, it is more difficult for UK firms to compete.
However, the fact that food price inflation in Ireland is lower than in the rest of the EU suggests that what we are seeing is a general rise in raw food prices across the EU, rather than a problem with competition or excess profiteering in the retail sector. So price control is not the answer. Furthermore, government price control never worked in the Soviet Union and it would not work here.
The best solution to consumers’ pain is for the Government to act to protect those on low incomes through the welfare system in the next budget.
