Workers expect rising inflation to outstrip any pay rises

Workers are resigned to pay increases not matching rising inflation over the next year, according to a new Central Bank publication.

As a result, they fear that they will be worse off in 12 months time in terms of real earnings.

The study found that the vast majority of Irish households expect inflation to rise further over the next year to an average of 10 per cent. But half of workers don’t expect to receive any pay rise over the period, with another third predicting only a slight increase in pay.

The majority of those who do expect earnings to increase believe pay will grow by less than consumer prices over the next year.

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A separate publication says costs for business have limited scope to accommodate increased costs, meaning that they will be passed on to consumers.

The findings have been published by the Central Bank in two economic letters. The first, A Snapshot into Inflation and Earnings Expectations by Irish Residents, is written by Kevin Cunningham, Garo Garabedian, and Zivile Zekaite and is based on a research collaboration between the Central Bank and the Ireland Thinks monthly survey.

It shows that people have become increasingly pessimistic about the outlook for inflation this year. The share of those who expected prices to increase more rapidly in the next 12 months increased from 53 per cent in February to 73 per cent in April.

The rate of inflation they expect to see has also risen and now averages 10 per cent.

On the earnings side, workers’ expectations of a pay increase has weakened over recent months. That views appears to be most prevalent in the construction and manufacturing sectors as well as in those part of the service sector with low customer interaction.

Among those who do expect a pay rise, the average expectation in April was for a 5.8 per cent increase. However, even those workers expect real earnings — i.e. pay adjusted for inflation — to fall by 3.5 per cent.

Among those surveyed, over half had taken no action to push for higher wages, although the authors note that stronger wage demands may surface in time, “especially if labour market conditions remain strong and/or inflation expectations increase over the medium term”.

The second economic letter, Business Costs and Consumer Price Inflation, was written by Stephen Byrne, Darragh McLaughlin and Martin O’Brien. It looks at costs of Irish businesses that are focused on the domestic market.

It finds that the rise in input costs as a result of supply chain bottlenecks and the war in Ukraine is being reflected in consumer prices now. They expect the trend to continue, meaning further price rises for shoppers over the next 12 months.

With a tightening labour market, the authors say, there is less scope for companies to contain costs by addressing their wage bill.

As a result, the paper says, company profits are expected to have fallen last year, with businesses facing similar challenges this year.

It concludes that the “most sustainable way of addressing rising input costs and minimising the scope for persistently high consumer price inflation is through productivity growth”.