Fighting inflation is an impossible job in an era of political populism

Most people expect to be worse off this year. Central Bank research published this week shows the public expect average inflation of 10 per cent this year, but don’t believe their earnings will rise anything like as fast. If this is even roughly correct, it will mean the first big fall in general living standards since the years after the financial crash. Managing this, in an era of populist politics, is going to be difficult, to say the least.

In the soundbite battle, Tánaiste Leo Varadkar is talking about protecting the “squeezed middle”, while the left-wing parties are focusing on “working people”. Everyone agrees the vulnerable must be protected. No one is getting to grips with the choices this will involve.

Playing for time is not the worst political tactic given the uncertainties we are facing. But with the war in Ukraine dragging on and energy prices rising again, ministers will know that they can only wait so long. The latest economic figures, published on Friday, show a stalling in consumer spending in the first quarter compared to the end of 2021, with the inflation hit starting to take its toll, though the multinational sector remains strong. By Budget day in October, the wider economic impact will likely be increasingly evident – particularly if the international economy weakens – and interest rates will be higher.

A lot is still very foggy. Are we looking at a once-off jump in prices through a year – or two – of higher inflation? Or something more prolonged? A lot of positions are being revised. This week Janet Yellen, the US treasury secretary, admitted she had got it wrong last year when she said the inflation jump was temporary and easily dealt with. Elon Musk said he had a “super-bad feeling” about the economy and Jamie Dymon, the JP Morgan Chase boss, said a hurricane was “right out there down the road coming our way”. Central bankers are falling over themselves hinting at higher interest rates. It feels like things are getting serious.

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Minister for Finance Paschal Donohoe – and minister for public expenditure Michael McGrath – kept the budget-day package in check last October through the remarkably successful tactic of pretending simultaneously that they were doing a great job, while at the same time saying there was no extra cash for 2022. They will face a tougher political fight this time around. For now taxes are strong. This will add to demands both from within Government and the Opposition benches to do more to protect living standards and accelerate progress in areas such as childcare, welfare and housing.

The last time real economic trouble arrived, after the financial crash in 2007, the hit to living standards came from falling incomes. This time it is from higher prices. The economics, and politics, of this will be different. Back after the financial crash certain groups were hit hard – those working in construction or sectors related to property, for example. Collapsing house prices caused big problems for those who had recently purchased.

Higher inflation, on the other hand, affects living standards across the board. Some are hit worse than others. New CSO data this week confirmed that less well-off households who spend more on energy and essentials are hit hardest. Rural households who spend a lot on transport, and younger households are also more affected. Strong house prices and high savings will give a significant buffer to older homeowning groups. However, everyone feels the pinch from price inflation at this level and it seems this is already being reflected in some areas of consumer spending.

Never enough

Dealing with this politically is hard on a few levels. Most obviously, whatever the Government does it will not be enough. This is where the length of the inflation surge becomes crucial. If it has started to tail off come budget time, there will be a bit more leeway. If, for the sake of argument, a threat to winter gas supplies is sending energy prices higher and hitting wider confidence, things will be a lot more challenging. Talk of a US recession may cause difficulties in attracting investment, and some of the big tech firms are facing challenges. We will have to see how this plays out.

Either way, in the current shouty, angry political environment, plotting a way through the inflation threat will not be easy. Choices will be needed, as the Irish Fiscal Advisory Council pointed out this week, between spending more to protect people from inflation and other spending demands. Or, perish the thought, more taxes. For this to work politically requires some trust in government that the burden is being fairly shared. In an era of populism, trust in government is scarce, both here and internationally. There will be the inevitable feeling that the ordinary people, however defined, are yet again taking the biggest hit.

During the financial crash we saw grudging acceptance in Ireland of cuts to living standards; the political consequences were dramatic, but they followed a few years later. In the current environment, things will surely move more quickly. There will be anger at falling living standards and increasingly strident demand for action. It will be interesting to see the turnout for the various marches and protests now planned in the weeks ahead.

All the Government can do, for now, is to make its plans and try to ride this out in the hope that the inflation surge will abate and the worst in terms of a recession can be avoided. Striking the right balance in terms of what actions to take will, as the Fiscal Advisory Council said, be hugely difficult economically, never mind politically. Right now the economy and the public finances have emerged from Covid shutdowns in much better shape than could ever have been expected. But as inflation hits, the political reality is that eaten bread is soon forgotten.