Economists tend to see inflation as one of two types: “demand-pull” where demand exceeds supply and prices go up or “cost-push” where the cost of production rises, forcing firms to raise their prices.
The current Covid-related surge in prices appears to be a combination of both: the lifting of restrictions has triggered a rebound in consumer spending – the main driver of demand in an economy – which has bid up prices. Equally supply chain disruption and soaring energy prices have hampered and bid up the cost of production.
Both these factors have driven inflation to decade-long highs in most countries. Irish inflation shot to a 14-year high of 5.1 per cent last month. The current increase is also due to base effects related to the deflation, which we saw in 2020 during the initial Covid shutdowns. Rising inflation was cited as a factor in the fall-off in Irish consumer sentiment this month. KBC Bank Ireland's latest barometer fell to a seven-month low. KBC Bank Ireland chief economist Austin Hughes noted that consumers have an ambivalent view of inflation.
“On occasion, rising inflation reflects an economic recovery or buoyant economic conditions and, consequently, can be associated with improving sentiment,” he said.
Hughes noted that at other times, higher inflation is unambiguously problematic. So, in the early part of this century and just before the crash, rising inflation coincided with sliding sentiment.
“An important consideration for consumers is the nature of inflation pressures. Whereas inflation caused by a booming economy may have both positive and negative associations, there is a very clear negative relationship between Irish consumer sentiment and global oil prices,” he said.
This might explain the recent dip in sentiment and hint at tricky times ahead.
