The Irish Times view on inflation: more than a temporary blip

The cost of living is back as a political issue as the rate of inflation remains stubbornly high. High and rising house prices – and rents – have been an issue for some time, but now general consumer prices are also in focus. The December rate of consumer price inflation was 5.5 per cent, the highest in more than 20 years, with rising energy costs the most significant factor. What forecasters and central bankers had thought would be a short and temporary rise in the rate of inflation now risks becoming more serious.

Central Bank governor Gabriel Makhlouf, speaking on Monday, held to ECB forecasts that inflationary pressures would ease as the year goes on, notably due to a fall-off in energy prices. But there has been a change in tone in ECB comments in recent weeks and a recognition that the risks are increasing. For Ireland, Makhlouf warned that while the inflation rate would moderate, it would remain higher than elsewhere in the EU – though in general the bank remains optimistic on the economic outlook here.

The cost of living – and in particular the impact of higher energy prices on less well-off households – is now a live political issue

While most forecasters agree that inflation will moderate, the risks are clear. Energy prices have risen sharply and as tensions build on the Russia/Ukraine border, gas supplies – and prices – will again be in focus. More widely, the longer inflation remain high, the greater the risk that it feeds into wage demands. If people start to expect a higher inflation rate, then the chances of it happening increase significantly.

One way or another, this looks set to be one of the features of 2022. The IMF has cut its forecast for world growth, partly due to higher inflation. Inflationary fears are already having a big impact on financial markets. And the cost of living – and in particular the impact of higher energy prices on less well-off households – is now a live political issue. Government measures to increase supports in areas like the fuel allowance were appropriate, though the money being spent on a €100 cut in energy bills to all households would have been better concentrated on those most in need.

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Higher inflation offers a whole range of challenges which have not been seen for years

If inflation is on the way back, wider political questions await. It would lead to pressure for higher public sector pay increases and for compensating tax and welfare measures in the budget. Remember Ireland is already a relatively expensive place to live. Interest rates would rise and so would the cost of borrowing for the State. A debate is emerging on the role for central banks. Do they return to their old-style priority of fighting inflation, or accept that some of this is inevitable in the wake of Covid-19 and should be tolerated?

Higher inflation offers a whole range of challenges which have not been seen for years. It could seriously complicate and change the post-pandemic world. It is too early to say that inflation is back to stay but what is happening is now clearly more than just some temporary blip.