Figures confirm that prices here came to be among the highest in the euro zone during the bubble era as inflation outstripped the European average, writes DAN O'BRIEN, Economics Editor
AS ANYONE who spends time elsewhere in the world knows, most goods and services in Ireland are expensive. During the boom years, grumbling about “rip-off Ireland” became commonplace – and for good reason. From the launch of the euro in 1999 until late 2008, prices here came to be among the highest in the bloc as inflation outstripped the euro zone average.
But that changed in 2009, when two consecutive years of deflation brought Irish price increases more into line with the average among countries using the single currency.
Full-year figures for 2011, released yesterday, confirmed that, although Irish consumer prices rose on a full-year basis for the first time since 2008, the rate of inflation was lower than the average across the euro zone. As a result of developments over the past three years, which reversed some bubble-era excesses, the overall price level at the end of 2011 compared to 1999 had increased only slightly more than the average across the bloc, with Irish prices up 33 per cent compared to a 28 per cent average increase across the zone.
But that headline figure masks major differences across the range of goods and services. While some prices have soared, others have fallen. To understand fully what has happened, it is necessary to look at patterns across different goods and services over time, and then compare those trends with peer countries.
This is done graphically. The first chart takes 1999 – the launch date of the euro – as year zero in order to illustrate most clearly how prices of different goods and services have evolved. The second chart shows the same data in a different format, but includes a comparison with the euro area average.
EDUCATION
Prices for education services have risen by a whopping 117 per cent in a dozen years, a rate of inflation that is far above any other category of good or service, and one which is two-and-a-half times higher than the average rate of inflation in education prices across the euro area. Even more amazingly, the recession has done little to dampen inflation in this area – prices in education services have continued to rise, owing largely to higher costs associated with going to university.
Relatively high inflation in services, such as education, is to be expected. Generally speaking, services prices rise more rapidly than goods prices because productivity growth is higher in manufacturing (owing to technological advances) and because services tend to be more labour intensive.
In education, labour costs are central. High wage inflation in the public sector over almost all the euro era was the main contributing factor to higher education prices.
HEALTHCARE
As with education, healthcare prices are heavily influenced by wage developments, and public sector wages in particular. Although the increase in healthcare costs – at 80 per cent over a dozen years – was lower than in education, it was similarly out of line with developments across the rest of the currency bloc.
Another notable factor here is the price of medicines. Most other countries prioritised the containing of pharma costs. During the bubble era, little was done in Ireland as public spending on medicines rose with little effort to use the State’s bargaining power as a dominant purchaser of pharmaceuticals to demand lower prices. Higher private insurance premiums and rising private doctor and dental bills also drove overall inflation in this category.
HOUSING, WATER AND UTILITIES
As the first chart shows, until 2008 prices in this category rose as rapidly as healthcare; since then, they have fallen back, largely owing to lower housing costs. Despite the large declines since 2008, the cumulative change since 1999 is considerably ahead of the euro zone average.
Higher energy prices over the past decade have been a global phenomenon owing to rising demand in the developing world. Their fall after the outbreak of the global recession contributed to the fall in prices in this category in 2009-10. Last year, however, prices soared again. Higher energy prices more than offset the fall in housing prices to generate higher overall prices in this category in 2011.
RESTAURANTS AND HOTELS
Inflation in the hospitality industry was the fourth highest among the 10 categories in the overall price index, rising by almost 60 per cent since 1999, but the difference with the euro area average was relatively small.
As with education and health, this sector is heavily labour intensive, accounting for the higher than average inflation. But competition and market discipline, which kept wage growth more closely in line with productivity, meant that prices have risen considerably less than in the public sector dominated areas of health and education.
As the first chart shows, the sector has also been more adaptable, with prices falling since the recession began.
FOOD AND NON-ALCOHOLIC DRINKS
Despite the strong upward trend in international food prices in recent years, owing to demand from the developing world outstripping global supply, prices in Ireland have been contained. Indeed, this is one of the few categories where inflation has been well below the euro zone average. The introduction of greater competition in the retail space, including the arrival of low-cost German grocery chains Aldi and Lidl, has been important in containing inflation in this category of goods.
COMMUNICATIONS
The long-running controversy over prices in the mobile phone market will only be fuelled by yesterday’s figures. Over the 12 years since 1999, technological advances and increased competition have driven down communications prices by almost a quarter across the euro zone, on average. In Ireland, there has been no reduction, in spite of the entry of more players into the market.
FURNITURE
Despite the frenzy of home buying up to 2007, which led to huge growth in demand for furniture and furnishings, prices have fallen since 1999, with all of the decline taking place since 2002.
The collapse of demand since the housing bust and the arrival of Ikea – first in Belfast in 2007 and then in Dublin in 2009 – has intensified the deflationary trend.
CLOTHING
The collapse in clothing and footwear prices has been doubly astonishing. Not only are prices almost half their 1999 level, but the sharp fall comes at a time when the rest of the euro zone experienced an increase in prices, albeit a small one.
The main factor driving prices down has been the liberalisation of international textiles trade, which is opening the EU up to low price imports, most notably from Asia.
Strong competition in the domestic retail sector in Ireland helped ensure that the price falls were passed on to consumers. Across the EU, retailers have differed greatly in the extent to which they have passed on the gains from liberalisation. In Britain, where many retailers serving the Irish market are based, prices have fallen precipitously, while in uncompetitive southern European economies consumers have benefited little from liberalisation.
Ireland a 'price taker' inflation mirrors trends abroad
THAT MOST people care a lot about what is happening to prices is reflected in the duration over which statisticians have been measuring inflation. In Ireland, it is one of the very few consistent statistical measures that goes all the way back to independence.
As the chart illustrates, inflationary pressures in Ireland mirror those internationally to a very considerable extent. As a small economy which imports a great deal of the goods and services people consume, Ireland is a "price taker".
That is seen most clearly in the two bouts of high inflation in the West since the State's founding – the first during the second World War, and for a more protracted period of runaway prices from the late 1960s to the mid-1980s.
But the chart also shows that inflation is not always with us. Deflation characterised the 1920s, and even more so the early 1930s. When Irish price levels hit their post-independence low point in 1934, they were 20 per cent down on a decade earlier.
Extreme shortages during the second World War resulted in soaring inflation, but prices quickly stabilised with the return of peace in Europe in 1945. Pressures began building in the late 1960s and, when oil exporting states closed the spiggots in 1973, an inflationary spiral took hold internationally.
That era, now known as the "Great Inflation", lasted longer in Ireland than most other peer countries as poor economic management by successive governments led to a failure to get to grips with a range of problems, including soaring prices.
By the late 1980s, the annual inflation rate was down to low single digits, broadly consistent with what economists consider to be price stability. Owing to the absence of marked boom-bust cycles in the developed world, the following two decades came to be known (wrongly, given high asset price inflation) as the "Great Moderation". In Ireland, consumer prices rose by just over 3 per cent on average annually between 1987 and 2008.
The global recession triggered by the 2008 financial crisis sucked demand out of the world economy. Price pressures disappeared and deflation loomed. In Ireland, the depression-sized collapse of the domestic economy led to two consecutive years of deflation – the first time that had happened since the 1930s. With the publication yesterday of full-year figures for 2011, confirming that prices rose last year, that period of deflation appears to be over.
