Ignore the political theatre. Prices are not coming down any time soon

The pressure on the Government to “do something” about high prices led to a particularly acute outbreak of performance politics. The retailers were “called in” by Minister of State Neale Richmond for what we were enthusiastically told were “frank” exchanges. Various threats to look at price controls or “name and shame” rip-off merchants, or to provide “deadlines” for prices cuts, were in the ether. There were even rumblings about a windfall tax, or that the competition regulator might be asked to have a look at things.

The retailers want a quiet life and were conscious not to get into an open row with Government, because you never know where that might lead. Governments can always make life a bit awkward. So they played along, put on worried faces about householders being under pressure and promised to pass on lower costs – when they could. Everyone knows that nothing much will really change on the basis of the meeting. The retailers may be indulging the Government by knocking a few cent off here and there on high-profile items, as has happened with milk and bread. Or maybe this would have happened anyway.

It all points to a wider problem for the Government as the inflation rate slowly eases, reaching 7.2 per cent last month on an annual basis. The rate of inflation may be falling, but other than declining petrol and diesel costs, most prices are still actually rising. The cost of living crisis lives on.

Is the grocery sector cashing in? It points out that its own costs and those of its suppliers have soared. Judgment is difficult because the big international retailers do not generally publish Irish results and it will be a while before we see figures from those Irish players that do. An interesting Europe-wide study by economists at Allianz, the insurance company, estimates that over the past year, around 90 per cent of the rise in grocery prices appears to be explained by rising costs, but that the rest may be due to companies trying to rebuild profit margins that were hit last year.

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Commodity prices have fallen back a good bit, but some remain high and the costs of inputs such as energy, packaging and so on have risen sharply. Prices at the farm gate are starting to fall back, but costs of packaged products have risen significantly. Some retailers may be increasing prices and margins under the cover of high inflation, but the bulk of the price rises are higher costs being passed on.

In terms of rising interest rates, ministers are also left howling at the moon, facing Opposition cries that they are sitting on their hands, but with little power to act

If the Government manages to embarrass the retailers a bit, then that is no harm. However, the political difficulty of this is illustrated by the fact that the day after they met the retailers, ministers met the farming lobby, which has warned that lower prices for commodities such as milk could hit its members. An agri-food regulator, being established under new legislation, is designed in part to examine who is getting what as products move through the chain from farmer to consumer. While its original motivation was to try to protect farmers, now there is also a focus on consumers.

The complexity of supply chains does not work on the stump, of course. Politics likes its pantomime heroes and villains, particularly in these days of increasingly polarised public opinion. If there is enough competition in the Irish market, then overly high prices in any area should not persist. And in recent years, up to the pandemic, the grocery market has appeared to be competitive, with competition intensifying thanks to the arrival of the lower cost retailers from Germany.

In fact, as food prices have drifted down over the years, many farmers and environmental campaigners – and some restaurateurs – complain that people should be paying more for high-quality, locally produced, sustainable food.

[ Conor Pope: Where will the cost-of-living crisis end? ]

Cold comfort

Looking at grocery prices since early 2021, analysis by economist Simon Barry shows that shoppers here have faced 75 per cent of the average increase in prices seen across the euro zone. And consumer food prices are 5 per cent lower than they would have been had prices here risen in tandem with the average. This is cold comfort for struggling households, but it doesn’t suggest that retailers here are cashing in any more than those elsewhere in Europe. Talk of the Government wading in via price controls or windfall taxes is just nonsense.

Ministers have got themselves into a similar pickle with electricity and gas prices. Lack of transparency in the sector in terms of hedging, and in some cases profitability, in the Irish market makes it impossible to judge whether prices to consumers should have fallen already. But with wholesale prices where they are, fall they will – at some stage. Just not all the way back to where they were before this all started. Here again ministers have been left muttering darkly that they expect energy players to move, though at least here – in a highly regulated environment – the plan for a windfall tax makes some sense.

And in terms of rising interest rates, ministers are also left howling at the moon, facing Opposition cries that they are sitting on their hands, but with little power to act. Except, of course, if they decide to press the button and compensate householders via the return of mortgage interest relief.

[ Inflation is falling - but here’s why things may not be getting cheaper ]

There are questions about why prices and costs across the board in Ireland are so high and have been for many years. The answers are predictably complex. There is work for the Government here to do but – as we have seen from efforts to reduce motor insurance – it is typically long, complex reform, trying to root out high-cost areas and ensure consumers get a break. This is important, but there are few quick wins.

The political question in the short term is how to deal with the lingering legacy of the cost-of-living crisis. Grocery prices may stabilise, but, on Aviva’s calculations, it will be heading into next year before they might start to fall noticeably. Energy costs should begin to drop, but will remain above what households were used to for many years. Interest rates are only heading one way.

Unable to really influence this, the Government will nonetheless continue to make noise, so it can take some credit when prices do fall. And then it will – under cover of a new national investment funds and a lot of talk about prudence – announce a giveaway Budget in October.