Competitiveness council warns of possible wage-price spiral

High inflation could force the closure of otherwise viable businesses, NCPC says

Excessive wage demands triggered by the current high level of inflation could lead Ireland into a wage-price spiral, the National Competitiveness and Productivity Council (NCPC) has warned.

Recent increases in global energy and transport prices have increased the cost of doing business for Irish enterprises, it said in its latest bulletin on inflation and the potential impact on competitiveness.

In particular, it highlighted the potential for inflation to produce “second-round effects”.

“It is vital that Ireland protects the competitiveness gains made in recent years, and that we continue to act to address inappropriately high domestic costs which are not matched by corresponding increases in productivity,” NCPC chairwoman Frances Ruane said.

Increasing business costs have implications for the costs of living, which in turn “have knock-on implications for wage demands, and to the potential creation of inflationary cycles”, the council said. It was essential that Ireland protects previous gains in competitiveness and continues to actively manage “inappropriately high costs”.

“In this regard, there is a role for both the public and private sectors alike to proactively manage their cost base and drive efficiency, thus creating a virtuous circle between the costs of living, wage expectations and cost competitiveness,” it said.

Inflation in the Irish economy rose to a two-decade high of 7 per cent in April thanks – in the main – to higher energy, fuel and grocery prices. Experts warn that the peak of the current price surge has yet to come and that price growth could hit close to 9 per cent in the coming months.

Damaging

In its report, the NCPC says periods of high inflation were damaging to the enterprise sector as the costs of doing business may rise too quickly for some firms to absorb, resulting in the closure of otherwise viable enterprises.

“Rising costs may also force some firms to postpone innovation and investment spending as they reallocate spending to cover higher current costs,” it said.

“Domestically-focused SMEs can also be negatively impacted by lower discretionary consumer spending, as Irish individuals are forced to allocate more of their household budget to the essential goods and services whose prices have risen,” it said.

The council noted that, as Ireland was a net energy importer, it could not avoid the current energy price hikes. European gas prices have, on average, quadruped between early 2021 and March 2022, driven overall by supply shortages and by above average spikes triggered by the Russian invasion of Ukraine.

"These higher oil and gas prices have had knock-on effects resulting in higher transport costs, including freight transport, with shipping costs between Asia and Europe almost doubling between March 2021 and March 2022," the council said.

Given the high level of uncertainty, there is an upside risk to the inflation outlook, it said, noting that a sustained energy price increase could add a further two percentage points to the Department of Finance’s headline inflation for 2022, which would bring its forecast to 8.2 per cent.

“This notwithstanding, it is worth noting that any easing in the rate of inflation in the second half of this year will likely reflect a slowdown in the rate of price increases, rather than prices falling from their current high levels,” it said.

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