Rural and lower-income households hit harder by inflation

Low-income, older and rural households are bearing the brunt of the current cost-of-living squeeze, according to a new study by the Central Bank of Ireland.

This is because they spend a greater proportion of income on heating, energy and personal transport.

In an economic letter, the regulator suggested inflation in the Republic would average 4.5 per cent this year – the highest level in over 20 years – before falling to 2.4 per cent in 2023.

However, it noted that this reflects an average and that different households experience inflation differently.

UK should bring forward tax rises to fight inflation, IMF says

---

Costs of soaring national debt will weigh on future generations

---

Fishing for Brexit opportunities will deliver an unsatisfactory haul

---

Inflation eases back to 5% but further price pressure expected in coming months

---

The letter examined how inflation levels differ across households according to factors including location, income and age.

It found that relative to higher-income households, lower-income households spend a greater share of their income on energy and food and less on goods and services, and therefore experienced a sharper price squeeze than other households.

So while the headline rate of inflation was 5.7 per cent in December, it was 6.1 per cent for lower-income households; 6.2 per cent for rural households and 6 per cent for both owner-occupier and older households.

Energy costs

Increases in energy prices were found to be the main driver of differences between household types. Of the 6.2 per cent inflation experienced by rural households, half of this was attributable to energy costs, specifically home energy costs and personal transport.

This compared with a 5.4 per cent inflation rate for urban households, of which 2.1 per cent was attributable to energy costs.

The bank’s research found that goods and food inflation tended to be broadly similar across household types. The lowest estimated inflation rate in December was for non- or low-driving households, at 4.7 per cent.

The bank’s letter also examined the historical data on inflation, finding that there have been periods when inflation is higher for low-income households, “but these have tended to be short-lived”.

Conversely there were also periods when inflation is relatively lower for low-income households, particularly the case in periods when energy prices were falling.

Policy

On the policy front, the study noted that monetary policy – typically higher interest rates – impacted aggregate demand and was “not necessarily the most appropriate tool for addressing supply-side drivers of inflation – such as energy price increases”.

It suggested “targeted supports” to offset higher energy bills could help the groups most impacted by recent price rises.

Households are to receive a €200 energy credit from March as part of Government measures to address the current inflationary spike.

Barry Cahill of consumer advocacy website Taxback. com noted excessive inflation was traditionally controlled by the European Central Bank increasing interest rates to dampen demand.

“However, it’s energy costs and not demand that is, for now, the primary driver of inflationary pressure, so increasing the ECB rate may not provide a solution to the current predicament,” he said.

“Before wage increase demands and subsequent increases become too high, thus embedding inflation in our economy, we need to look at other ways to deal with the situation and also as how we can support those most impacted by inflation,” he said.

Mr Cahill said the Government had several levers it could pull that would rebalance people's purchasing ability, without further fuelling inflation.

“The principal lever is taxation, and we can see scope to reduce the tax take to ensure that workers’ purchasing power isn’t unduly impacted by the current high inflation,” he said, while suggesting the Government should consider building in an inflation-tracking factor into each year’s budget to better protect people’s incomes.