Credit: Houses of the Oireachtas

How inflation is a direct result of Government policy

Stealth taxes are named as they are for the simple reason that a lot of the time, you don’t even realise how much tax you are paying. It is probably not well known in Ireland, for example, that the average price of a litre of unleaded petrol is just 78cents. Well under a euro. If you have, like me, a car with a standard 60 litre tank, then filling it up costs just €46 – before tax.

With the tax, of course, the full price is closer to €1.75 per litre, and filling your tank – if it’s completely empty – costs about €105. More than half the price goes straight to Government.

What’s more, the way the taxes are structured means that the higher the price goes, the more tax you pay. The tax is a percentage of the underlying costs, not a fixed fee. As prices rise, the taxes accelerate, meaning every price increase hits you in the pocket harder.

It is also not well known – or perhaps, not regularly though of – that higher energy prices are not an accidental result of Government policy. They are Government policy.

The basic thesis of Irish Government policy is that by pushing the price of fossil fuels higher and higher, people will use less of them, and that eventually, you’ll give in and buy an electric car. That is, after all, the green dream: A nation of electric car users, who drive only about once a week, cycle most of the time, or use an electric train. The electricity, of course, all being supplied by the wind. You can’t make an omelette without breaking a few wallets.

These price rises, though, have side effects: They don’t just increase the costs of fuel. They also increase the costs of goods: It costs more to transport food to shops, or components from factories. It costs more to power our remaining fossil fuel energy plants. Your food goes up. Your electricity goes up. Soon, the European Central Bank will raise interest rates, so your mortgage will go up. We are at the beginning of an inflationary cycle: Things will have to get much worse, before they get better.

It has been the same with every inflationary cycle in history: The only way to stop price rises is to reduce demand, and reduce the amount of money in circulation. There has never been, in economic history, a painless correction of inflation.

It is the job of politicians to avoid blame, and re-direct it. And so, we will start seeing many more calls for policies like this one:

This will start – as it always does – on the far left. Soon enough, it will be the policy of Labour, and the Social Democrats, and Sinn Fein. And then it will be the policy of Government. It is the usual cycle: Pass laws that make bad things happen, and then try to stop the bad thing by passing a law against it. Our housing market – regulated to within an inch of its life, with landlords fleeing left right and centre to be replaced by big companies with dedicated teams of lawyers to handle the regulation – is a good example of that. Government policy created the problem, and now there are calls to fix it by banning big companies buying property.

Of course, Irish housing policy is inherently inflationary, because of the massive demand suction effect being created by the Government: Consider that Government alone wants to build 30,000 homes a year, refit 700,000 homes to be more energy efficient, and is deploying billions of euro to Donegal to repair MICA-damaged homes. Taken together, that is a massive injection of cash – and demand – into the housing market, sucking up builders, engineers, plasterers, painters, surveyors, and everything else. An ordinary person who just wants to build their own home is competing with Government funds for materials, builders, and everything else. Government policy in almost every area of Irish life is driving prices through the roof.

The core problem here is that western politicians – not just in Ireland – have two objectives which cannot be reconciled. On the one hand, they want prices to rise to make renewable energy competitive by comparison with fossil fuels. On the other hand, they want prices stable so that they can be re-elected. They simply cannot have both.

The problem has been added to, of course, by central banks. Both the US Federal Reserve and the European Central Bank have been, for the past decade, involved in a massive money-printing exercise. If you have ever heard of “quantative easing”, then this is what it is: A fancy name for printing money. The laws of supply and demand also apply to money itself: The more of it there is, the less it is worth. We are beginning to see the impact of that, right across the western world. The Irish Government cannot even use one of the most important tools to fight inflation: Interest rates are set in Frankfurt, not Dublin.

Modern politicians are blessed and cursed in equal measure in that none of them – not one – has experienced an inflationary crisis before. The last time inflation was a problem was in the late 1980s. We do not have politicians who have seen all of this before. As a result, many of them are in open denial about the nature of the problem, and the misery that will be involved in fixing it.

The voters might not always be able to connect Government policy with high prices, but when things are going badly, they’ll know who to vote against. And the terrifying thing for Irish politicians is that, having surrendered our interest rates to the European Central Bank, they’re left to fight inflation with one hand. Having amputated the other all by themselves.


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