Nothing retro about prices

PRICES THEN AND NOW:The mantra coming from Government is that Budget cuts won't hit so hard because prices have gone back to 2007 – but that's simply not the case

THE GOVERNMENT has not given much by way of sweeteners to make the Budget palatable to consumers, many of whom will see in excess of €3,000 lopped off their take-home pay next year.

A couple with three children, on an annual combined household income of €75,000, will see their pay packet shrink by €1,815 or €151.25 per month, following changes to tax bands and credits. That’s a decline of 3.6 per cent. But that is not where their story ends. If their children are under 18, they will lose a further €40 per month in children’s allowance payments. If they have a child in university, one in secondary school and the third in primary school, increased registration fees and transportation levies will see an additional €75 per month disappear from their net income. All told, this family can expect to be worse off by €225 per month next year.

By any definition, this is very bad news. One line of defence – the only line of defence, perhaps – the Government has put forward is a statistical one. Brushing away the old truism about lies, damned lies and statistics, ministers brave enough to stick their heads above the parapet in recent weeks have been trotting out the line that the cuts and tax hikes aren’t actually that bad because prices, across a broad range of goods commonly bought by Irish consumers, have fallen to levels not seen since 2007.

The notion that consumers should be celebrating because prices have returned to the levels they were at in 2007 is a bit rich. Back then, we were all complaining loudly about rip-off retailers and service providers who were making us pay over the odds for virtually everything money could buy.

Consumers would also be forgiven for asking exactly what the Government had to do with driving down these prices. Grocery prices have fallen because the biggest retailers in the Republic felt they could no longer let their business migrate across the Border, while mortgage rates fell as a result of steps taken in Frankfurt, not Dublin.

To say prices have fallen is true, but it is an over-simplification of the reality and the averages do not apply to great swathes of the population, according to consumer advocate Dermot Jewell.

Jewell, the chief executive of the Consumers Association of Ireland, says that while prices have fallen in certain areas, it would be completely wrong to suggest most consumers are not suffering as a result.

“Some prices have come down in some supermarkets, some of the time, but they fluctuate alarmingly,” he says. “Overall, the products that people need in their weekly shopping basket have not gone down and stayed down, so it is very hard for people to make long-term savings they can rely on. Yes, if you break down your weekly shop into five supermarkets and visit all five every week you can make savings, but who has the time to do that?” he asks.

While the Consumer Price Index (CPI) statistics from the Central Statistics Office (CSO) are scrupulously drawn up and gives specific weightings to more than 20 types of goods and services (depending on the portion they make up of the average consumer’s monthly spend) there are some gaps. There is a dearth of statistics compiled on specific income groups and the reality is that basics such as food, rent or mortgage payments, utilities, insurance and transportation are a much bigger percentage of someone’s income if they are earning €20,000 a year than if they are earning €100,000.

One area where prices have fallen significantly in the past three years is mortgages. Someone on a variable rate mortgage is paying around 3.5 per cent compared with 5 per cent in 2007. That is a big saving, undeniably. But it is almost certainly short term.

The banks are in a very difficult position, largely because of their own reckless lending over a decade. They gave out too many tracker mortgages and now those mortgages are costing the banks a whole lot of money – and it is money they do not have. They have to find ways of raising extra cash and the people who are going to take the hit are those on variable rates. It looks almost certain that those rates will increase by at least 1.5 per cent, and possibly more, over the next 12 months and stay at those higher rates for some time to come. This will take them to higher than 2007 levels.

Trackers are going to go in the same direction, although at a slower rate, baring some unforeseen developments at ECB level.

Rents have fallen according to the statistics but the averages have been skewed by very sharp declines in some areas. Someone who is tied in to a long lease or is vulnerable or unable to argue for a rent reduction may find their rent has not fallen nearly as much as the averages suggest.

Then there is insurance. Car insurance, home insurance and life insurance have all increased in the past three years and look set to rise further. The annual cost of covering a family on VHI’s Plan B – its best-selling scheme – was €1,813 in 2007. The cost of covering the same family on VHI’s Plan B this year was €2,252

“All insurance prices have gone up,” Jewell says. “All utility prices have gone up, even when you factor in new entrants to the market, so it is impossible for consumers to keep pace no matter how hard they try.”

Education costs have climbed dramatically – nearly 25 per cent according to the CPI. While education accounts for only around 2 per cent of the whole CPI, there are a lot of people for whom education is zero per cent of their costs and tens of thousands of others for whom it is considerably higher than 2 per cent. In some families, education costs could top 20 per cent of their total disposable income. Similarly, childcare is less than 1 per cent of the CPI basket, but for a family with two children of creche-going age which has to pay around €2,000 per month, it can cost a huge proportion of their monthly income.

“You can look at averages and say that prices have fallen and that things have changed for the better,” concludes Jewell. “But when politicians use it as an excuse to justify cuts, they are not telling lies but they are certainly not telling the whole truth either.”

THE CONSUMER PRICE INDEX BASKET 2007–2010

Food and non-alcoholic beverages(estimated by the CSO to be 11.75 per cent of an average household's total spend) Up 0.9 per cent

Alcohol and tobacco(6 per cent of total) Up 10 per cent

Clothing and footwear(5.4 per cent of total) Down 21 per cent

Housing, water, electricity, gas and other fuels(16.5 per cent) Down 12.8 per cent. Mortgage interest is reckoned to be 6.7 per cent of overall spend; rent, 2.9 per cent; electricity, gas and other fuels, 4 per cent

Furnishings and household equipment(4.4 per cent of total) Down 8 per cent

Health(3.15 per cent) Up 13.3 per cent. Weighting is roughly evenly split between medical products, outpatient services (including doctors) and hospital services. Health insurance is not included.

Transport(13.3 per cent) Up 3.5 per cent. Car purchase weighted at 5.6 per cent; motor fuel, 3.75 per cent and transport services (bus, rail, plane, taxi etc) 1.6 per cent

Communications: telephone, broadband, etc(3.4 per cent) Up 1.8 per cent

Recreation and culture(10.1 per cent) Up 1.2 per cent

Education(2.04 per cent) Up 24.6 per cent

Restaurants and hotels(15.43 per cent) Up 2.7 per cent

Miscellaneous goods and services(8.43 per cent) Up 11.3 per cent. Weighting made up of childcare, 0.99 per cent; health insurance, 1.8 per cent; car/bike insurance, 1.4 per cent; home insurance, 0.75 per cent