One of the stories of the economic recovery has been that consumer prices have remained almost flat. On average. The qualification is vital. The “basket” of goods and services used to measure price rises is, of necessity, an average. The fact that it has increased by only 1 per cent over the past year, and wages on average have risen by some 3 per cent, means that people in work are better off. On average. And so the election takes place as a rising economy lifts many boats and this is a vital backdrop to the debates on tax, spending and services.
But the average hides enormous variations. And those who spend a significant portion of their incomes on housing – especially rent – and services such as childcare and education, have seen steeper price increases in recent years . And so the squeezed middle – younger families renting or with big, newly minted mortgages – is a reality.
Just as it is nonsensical to argue that many people have not seen increases in their living standards in the last few years – look at the rise in job numbers and salaries – it is also necessary to recognise that a significant number have not shared in the gains, or not by much, because their particular cost of living has risen.The feelgood factor from the extraordinary period of growth is not universal.
1. The feelgood factor – a high-cost country
The first point to note is that Ireland is a relatively expensive country. This refers to the level prices are at – as opposed to their rate of change. But the position you start from is important and this goes some way to explaining why wages here do not go as far as in many other countries. Tax burdens also vary of course – they are relatively low or lower salaries here and relatively high on the highest earnings.
The latest Eurostat figures, drawn from a survey of 2,000 goods and services in each country, show the Republic as the second most expensive country in the EU, with prices 29 per cent above the EU average. Only Denmark is higher – so too are non-EU members Norway, Switzerland and Iceland. Strikingly, Ireland is costlier than Sweden and Finland.
This is a relatively long-standing issue. And the figures show prices are higher here pretty much across the board, with furniture being a notable exception– and Ireland fourth in the food and beverage category.There are a lot of different reasons for this – and our small island nature and lack of competition in some sectors plays a part. But we have developed over the years into a higher cost/higher wage economy with relatively high prices in areas such as insurance, professional services and mortgages. Also, in some other countries, services such as health and childcare are more affordable, often due to a different provision structure or more State involvement funded by taxes or social insurance contributions.
2. The feelgood factor – different strokes for different folks
It is possible to generalise too much. But the recovery has been generally benefited many of those already owning houses – particularly those towards the middle or end of their mortgage, or with it all paid off. These typically older households have benefited from the recovery without paying more via higher rents or big mortgages. In fact lower mortgage rates will have saved many significant sums.
Many also have more secure pensions – a big, long-term issue. To a great extent the wage increases since 2015/16 have flown through to the bottom line for these people. Spending has not boomed as a result – some are still paying off debt and many are cautious – but it has now started to rise, by around 3 per cent per annum on average across the economy, and likely more for many of these households.
The flip-side are those, typically younger, who are renting, or seeking a place to rent, or looking to enter the housing market. Add in the sharp rises in areas such as health insurance and increases in childcare costs and you can see why some remain squeezed, despite overall prices levels on average remaining flat.
When you consider that a younger couple could easily spend well over half their disposable income on rent or a mortgage and childcare for a period of their lives , then you can see how the prices facing them are not really captured by the “average”. And of course the affordability and rental crisis has had a more profound impact on many, locking them out of the housing market and leading to significant uncertainty about their long-term plans.
3. The feelgood factor – goods versus services
As the country gets richer, the proportion of incomes spent on goods – particularly basics such as food – continues to fall. We spend nearly €1 in every €3 of disposable income on food in 1980, it is now around €1 in every €7.
And within today’s population, people on better incomes tend to spend a higher proportion on their incomes on services, while lower income groups spend more on goods. There are huge variations here between different regions and age-groups as well. As we have seen, younger age groups spend more on rent and housing, many families spend heavily on childcare and so on. And outside Dublin, the proportion of income spent on rents or mortgage repayments is typically less – but then so are the available jobs.
So the squeezed middle, as we think of them, are likely to be younger urban families juggling high rent bills or mortgages.
An interesting study by Fidelity in the UK a few years ago estimated that "millennial" inflation was significantly higher than the average as they spend proportionately more on areas such as education, eating out and rent – where prices are rising more rapidly. Also, they are more inclined to eat out and thus spend less on groceries, where low-price retailers have driven down prices.
In the Republic, the variation in the trend between goods and services prices in recent years is very striking.Goods prices are now almost exactly the same on average as they were in the year 2000, having risen during the boom of the early 2000s, then fallen back. Service prices , meanwhile, have almost doubled since 2000. And these trends are continuing, with goods prices down 1.7 per cent in the year to last November and service prices up 3 per cent.
There are a few key trends behind this. The prices of many goods – think consumer electronics, clothing and so on – have been driven down by relentless competition, in some cases innovation and the emergence of international supply chains, often allowing low costs. Food prices have also fallen in many areas, with enormous competition in the sector, partly due to the entry of lower-cost retailers. Whether this relentless downwards pressure on goods prices, notably for food, is sustainable is a significant question.
If we want sustainable food, we probably need to pay for it. And likewise, the extent of global supply chains may start to be challenged in some sectors on sustainability grounds. But for now, many goods are relatively cheap compared to recent history.
Services are another matter. We have already seen much analysis of why mortgage costs to households (though not mortgage rates) have risen as house prices have jumped, as have rents. There are complex effects here – lower mortgage rates will have delivered a net gain to many, but will not have offset the squeeze on those more recently on the housing ladder.
Competition is also lower in some service sectors and a combination of factors – many reflecting a “high-cost Ireland” factor in areas such as insurance – have pushed up prices in areas such as childcare. In this sector, prices are up 6 per cent on average over the last three years and anecdotal evidence suggests some have faced much higher rises.
Medical costs, such doctor fees, are also on the rise in recent years. And the data shows a sharp jump in third-level education costs , which have almost doubled since just before the crisis hit as universities increase charges and fees. This is a significant issue for many better-off households, the data shows.
4. The feelgood factor – the politics
The rise in real earnings for many in the last few years should play to Fine Gael’s advantage during the general election. However this hasn’t quite sparked a “feelgood” factor – more a “ feelfine” factor, with consumer spending rising, but still moderately enough, and consumer borrowing remaining subdued. And as we have seen, there is a significant group who remain squeezed because a large part of their spending “basket” is taken up by services whose prices have risen sharply in many cases, in contrast to the flat overall inflation picture.
It is easy to generalise – some younger households have benefited from the buoyant jobs market, or from the sharp increase in earnings seen in some sectors, notably ICT and some areas of finance and services. But many in this group – particularly those struggling to buy a property – will feel locked-out of the recovery, while others will still feel squeezed.
How to appeal to this group is a key challenge for the parties. Better childcare and more affordable housing would help – but delivering these is a real challenge, made all the more difficult by the cost of getting things done in high-cost Ireland.
