CSO figures: Yeah, inflation is back, baby

If you’re in your late thirties, like me, then you are just about old enough to remember the evils of inflation, and the problems it wrought on the Irish economy in the late 1980s and early 1990s. As the value of money decreased, prices went up. As prices went up, the Government tried to make money more valuable, by putting up interest rates. The interest rate today is about 3%. All the way back in 1993, it was 13.99%.

Just to put that in context, a 20 year mortgage of 200,000 euros costs about €1,200 per month at present interest rates. At 1993 rates, that same mortgage would cost you…. €2,500 a month, or thereabouts. Thanks heavens, we’re not going back to interest rates like that.

Are we?

Irish inflation hit a 10-year high in August, driven by a rise in the cost of transport, housing, restaurants and hotels.

Central Statistics Office (CSO) data shows consumer prices rose by 2.8 per cent in the 12 months to the end of August, the sharpest level of price growth seen since November 2011.

The latest figures come amid a series of warnings about rising costs for businesses in several sectors.

The acceleration in prices is connected to the resumption of economic activity after lockdown, supply chain blockages, higher oil prices and Brexit.

Inflation is relatively easy to understand, as economic concepts go: It is basically supply and demand. When there is more demand for oil, the price goes up. When there is less demand, the price goes down. But the same is true of money itself: When there is more money in circulation, people are able to demand more things, which pushes the demand for goods up. The more money there is, the less valuable the euro in your pocket becomes.

That is why banks and Governments use interest rates to control the value of money. When they put the interest rate up, you are encouraged to save your money. This takes cash off the street, and into long term savings accounts. It stops you from borrowing money, and putting more money into circulation. When interest rates are reduced, saving becomes less attractive, and borrowing becomes a better option. This increases the amount of money in circulation.

And, of course, there’s the third option: Printing money. When Governments and central banks just create more money out of nothing, this increases the amount of money in supply.

This can be a good thing, of course: If there is a crippling recession, printing more money to give to people and companies can increase the demand for goods and services, creating jobs and employment. The problem arises when you print too much.

Last year alone, the European Central Bank printed an extra trillion euros:

Under pressure to act to bring down borrowing costs for indebted, virus-stricken countries such as Italy, the ECB launched a new, dedicated bond-purchase scheme, bringing its planned purchases for this year to 1.1 trillion euro with the newly agreed buys alone worth 6% of the euro area’s GDP.

What does that mean? Well, the ECB printed the money to buy Italian debt. To speak in plain English, what they did was this: They paid back the people who had lent money to Italy, and just printed the money to do it. That’s what a “bond purchase scheme” is. And in so doing, they increased the amount of euros in circulation by 6%. That is to say, there are 6% more euros in existence than there were a year ago.

It should not be surprising, then, that Irish inflation is at a ten year high.

It is unlikely, in all honesty, that we need fear going back to the days of the early 1990s. Economists are acutely aware of the dangers of high inflation. The problem, really, is twofold: First, over time, interest rates will have to rise, to keep inflation under control. Maybe not to anything like 14%, but certainly higher than they are today.

Second, the ECB and other central banks are running out of room to keep printing money. If they continue to do so, they risk an inflationary disaster.

And a bonus point: Higher prices are bad for Governments. People will start to notice, if they have not already, the amount they are spending on their weekly shop. They will feel poorer. Taxes will feel more oppressive.

That’s not a recipe for a happy population, or Governments getting re-elected. Quietly, inflation is going to be an important story for the next few years.

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