There are signs that inflation is now firmly on the wane. The latest consumer price index figures show the annual rate falling to 6.6 per cent in May, while yesterday Tesco announced that it was cutting the cost of a wide range of its products. Minister for Finance Michael McGrath responded that this could be a “turning point” and that other grocers could quickly follow.
It will take time for it to be clear just how significant the latest moves are, but there are some reasons to be optimistic. One is the sharp fall in wholesale energy prices, with gas in particular now trading well below 2022 levels, albeit still a bit above the prices which had prevailed for many years before the increases started. There is still some uncertainty about supply in energy markets, but overall the crisis period of soaring prices and fears of power cuts seems to have passed.
The second, and related reason for optimism is the unwinding of some of the pressures on supply lines which had occurred after Covid. Shipping costs, for example, have fallen back to more normal levels. And the cost of many commodities has also declined.
The move by Tesco suggests that all this can lead to falls in prices for consumers, as lower costs are passed on. Energy bills to households should also fall over the coming months, setting them on a firm downward trend if current wholesale market trends continue. In both grocery and energy markets we must hope that competition helps to drive prices lower. These two key markets are different – the energy market is heavily regulated – but in both cases companies should be fighting to retain and win over customers.
While food and energy prices should fall, elsewhere it may be more a case of them not going any higher. The overall rate of inflation will ease, in other words, even if the actual level of prices does not fall in all cases. In some areas of the economy in particular, notably restaurants and hotels, it appears that factors such as labour shortages and wage pressures are leading to higher prices.
A concern at Government level will be that even if inflation does fall, it will remain above ideal levels – the European Central Bank, for example, targets a rate of 2 per cent. Pressure on costs, and some cashing in by companies, could lead to inflation staying higher, for longer. This is a particular risk in Ireland, given the strong growth in the domestic economy and particular pressures in some areas, notably the rental market.
Ireland is already one of the highest cost countries in the euro zone and it is important that this problem does not worsen as we emerge from the worst of the cost-of-living crisis. The budget needs to help people to cope with inflation, but not add to the problem. Delicate judgments will be needed, particularly given the need to continue investing in key areas such as housing.