High price levels put squeeze on the poor

OPINION:A number of forces are inexorably pushing up inflation, and high prices are likely to stick, writes Paul Sweeney.

TWICE, MOST Irish economists got it wrong on prices. They were forecasting that inflation was falling in spring 2006, when Towards 2016 was being negotiated. The ESRI, the Central Bank and bank economists had it too low. Congress was substantially more accurate, but was still slightly below the outcome of 4 per cent in 2006 and 4.9 per cent in 2007.

The sharp rise in consumer prices last month came as a big surprise to economists again, yet there has been widespread evidence that there are a number of drivers that are inexorably pushing up inflation internationally. As will be demonstrated, high prices are likely to stick.

Global inflation was at 4.8 per cent in the year to November 2007, a full two percentage points up on the previous year. Even as America flirts with recession, its consumer prices are up 4.3 per cent, over 2 per cent higher than a year earlier.

In the euro area, inflation is running at 3.3 per cent, the highest in 14 years. China's inflation rate, at 8.7 per cent, is the highest in 12 years, up by 6 per cent in one year. Russia, some central European countries and many South American countries are also experiencing very high inflation rates.

The big drivers of inflation are oil and food prices. Commodities - energy, agricultural and materials - hit an all-time high in early March 2008. Last week oil hit $107 a barrel for Brent and Nymex West Texas hit a record $111. Oil has risen by 87 per cent in the year. The demand for oil, an input into so many products, continues to grow, but supply is uncertain. The Economist's dollar-based commodity price index rose by 40 per cent and its food index by more than 70 per cent in the year to March. Experts predict that oil and food prices will continue to rise at higher rates than overall prices for some years.

The price of tea will jump to an all-time high in 2008. Coffee and cocoa are also reaching record levels in 2008. Arabica coffee, the premium bean, reached a 10-year high in February, up 36 per cent in a year. Milk and dairy product prices have been accelerating in Europe in recent years. Beef prices are rising rapidly in the US.

Biofuels are taking more land out of food production all over the world, boosted by taxpayer subsidies. High oil prices will continue to feed into high food prices through the cost of fertiliser. The UN is drawing up plans to ration food aid as commodity prices soar.

In spite of the recession in the US, consumer prices are still rising. The price of wheat, corn and soy beans reached record levels last week. The US will become a net importer of wheat this year, pushing up the worldwide price of bread further. Rice hit a 20-year high in early March.

One reason for high inflation at home is that some essential food prices have been soaring. Overall food prices are rising much faster than overall goods inflation. The price of basic food products has risen sharply in the past year. For example, flour prices have climbed by a staggering 46 per cent and bread by 23 per cent. With the US importing wheat, both will rise much further. Milk has also gone up by almost one-third, while eggs, butter and biscuits have gone up by multiples of the overall price rise of 4.8 per cent. Food price rises disproportionately hit the lower paid and families dependent on social welfare.

While there is much comment about inflation, few economists pay attention to price levels, which are very high in the Republic. As the table shows, the Republic has the second highest price levels in EU15, at 23 per cent above the average for consumer services, and at 14 per cent for consumer goods, is second only to Denmark. Even Sweden is behind us on price levels.

The strong international inflationary pressures will keep inflation high in 2008 and 2009. High price levels in Ireland and this rising inflation are a worry.

Paul Sweeney is economic adviser to the Irish Congress of Trade Unions and author of Ireland's Economic Success.