Ireland's high prices are a matter of perspective

John FitzGerald: Price level here is more than compensated for by other factors

Since I was a child, one of the exciting things about travelling to another jurisdiction has been the variety of products on sale in shops that are not available at home. At the age of seven, a day out in Newry opened up a vista of sweet shops with a range of never-before-seen (or tasted) products such as Spangles boiled sweets.

With advancing age, I have become less interested in boiled sweets, and globalisation has seen a homogenisation of the range of produce available in supermarkets everywhere. While I only got to eat a fresh peach for the first time when I was 17 (because they were not grown in Ireland), such exotics as Vietnamese dragon fruit are today available in my local supermarket.

However, as an economist I am also curious how, in a world of free trade, the price of the same product can be very different depending on the country in which you buy it. One would have thought that, at least in the European Union, the price of groceries would be pretty similar across member states, give or take differences in tax rates. However, they are not.

As a visitor in foreign lands, it is easy to compare the prices of specific products with prices at home, but it is not so easy to establish how much the overall price level differs across countries.


Differing tastes

The problems faced in measuring such price differences are twofold. Firstly, consumers in different countries have different tastes. Thus consumers in Italy spend a higher share of their income on pasta than on potatoes, while it is the reverse for us Irish.

What’s typical for any given product may also vary across countries – Italians are more discerning about the range and quality of pasta they buy. There may also be marked national differences between how important different categories of goods are in overall consumer spending. For example, in warmer climates, spending on heating may be lower than here.

Thus the basket of goods and services used in developing a price index for comparison purposes should differ across countries.

Forty years ago, the then EU statistical offices held a series of meetings to iron out the finer details of what was to be included in price comparisons. At one meeting in London, the nine gentlemen (no women) from the statistical offices first visited supermarkets to discuss the different qualities of groceries.

When they moved on to a department store to study differences in quality of clothing, they ran into problems. The management had not been informed of their presence and when the nine men, having finished in the men’s department, went on to examine women’s underwear and discuss national preferences and tastes, the management moved in and requested them to leave.

In Ireland, the high level of prices is more than compensated for

In spite of these difficulties and embarrassments, we now have measures of national price levels. While still imperfect, they allow us to compare price levels across countries.

They show that across all the goods and services that we buy today, the price level in Ireland is 20 per cent higher than the average for the EU15.

The UK’s position has tended to fluctuate because of changes in the value of sterling, which are not immediately reflected in their prices. As a result, while the UK last year showed a price level that was 10 per cent higher than the EU average, it had been 25 per cent higher in 2015, before the Brexit referendum.

Healthcare costs

The EU data also shows price comparisons for different types of goods and services. It is no surprise that it is in housing and in consumers’ health costs that Ireland fares worst compared to the rest of the EU15, with a price level 40 per cent above the EU average.

Our prices for food and clothing were about 10 per cent more expensive than in the EU15. However, where Ireland was actually cheaper than elsewhere in the EU15 was for furniture and household appliances, and for recreation and culture.

In the case of health, the figures are deceptive. In some countries taxes are much higher, with more of the cost of healthcare funded out of taxation. Consumers in those countries may spend less on health, but may make up for it by paying higher taxes.

So comparisons of standards of living are complex as they depend on the level of income, the average tax rate and the price level. In Ireland, the high price level is more than compensated for by higher incomes, leaving Ireland with an above-average standard of living compared with our EU neighbours.