Credit: Gript

Price freezes will soon be popular – and deadly dangerous

The inflation rate hit 5.6% in February, per the latest official figures from the Central Statistics Office. But the official figures, of course, only paint a part of the picture: Fuel costs have soared, with diesel and petrol and home heating oils increasing at an annual rate of between 30 and 50%.

One of the biggest, and most unavoidable, problems with Ireland’s long term economic strategy is that our success is built on being a global, open, trading economy. When things are going well, that works tremendously to our advantage. But, as we learned in 2009/10/11, when things go badly internationally, they leave the Irish economy horribly exposed.

In this case, Ireland is being hit by an international triple whammy: First, the enduring impact of the covid 19 pandemic on global production, and supply chains, has impacted the supply of many goods and made them more expensive. Second, the European Central Bank’s long term policy of money printing – or, as they call it, quantitative easing –  has progressively increased the overall supply of euros, and thus eroded the value of the currency. And third, of course, the war, and the impact on the west of the sanctions it has (rightly) placed on Russia.

One of these three factors hitting at once would be bad enough. All three happening concurrently is provoking a full blown cost of living crisis. And politicians, no matter how much they protest to the contrary, don’t have many tools in their arsenal with which to fix it.

One problem, as we saw yesterday, is that in the case of oil, the price is rising faster than taxes can really be cut: a 15c a litre cut in excise duty actually resulted in prices going up at my local station yesterday. There will, of course, be political temptation to start ranting and raving about corporate greed and gouging petrol stations and, while there may be a grain of truth to that in some cases, the problem is that it is mostly just empty rhetoric: Prices are soaring because oil is a futures market, and we are currently in an oil shock.

The worse news is that much of the impact of the oil price shock has not really hit home yet: We are fortunate, for example, that it is coming at the tail end of winter rather than the beginning. Demand for home heating oil should be slightly off peak. But the bigger issue is what this is going to do to international transport and freight costs: Shipping and air transport is about to get a whole lot more expensive, and the people who will ultimately bear those costs are the consumers of the goods those vehicles ship. That’s before we add on the price of lorry transfer from the ports and airports. Few of those cost increases have begun to filter through yet, at all.

So what can Irish politicians do? Not much, is the painful answer. Bear in mind that as costs rise for you, they rise for Government too. If the euro in your pocket buys less, the euro in the revenue’s pocket buys less too. In fact, by responding by massively increasing spending, the Government is likely to make the problem worse: Every euro spent increases demand for whatever it is spent on which, ultimately, pushes up the price.

There are a few nuclear options in the Government’s arsenal: The national petroleum reserve holds enough oil to supply the nation, in a time of crisis, for three months. If prices continue to soar, they may come under pressure to release some of that reserve for domestic consumption. After all, the one way to fight inflation – to bring prices down – is to either increase supply or reduce demand. Demand for oil cannot be reduced in the short term, but the Government can, in extremis, temporarily increase supply.

Such a step would be extreme though, since the reserve is not intended for price control use. It’s there if there’s a crisis which means we run out of fuel. Not to be used for political reasons to reduce the price.

There will be those, of course, on the left, who call for the other solution: Price fixing. Or perhaps price freezing. That means basically setting a law banning further price increases, to help consumers.

The problem with this idea is that unless you fix the underlying problem, a price fixing law will ultimately destroy businesses and lead to shortages: Think about it for a moment. If the price of milk, for example, kept increasing, and the Government reacted by fixing the retail price at €1 a litre, that might be popular in the short term.

But it is a useful exercise to think about all the components that go into producing your litre of milk: The cost of fertilising the grass. The cost of feeding the cow. The cost of transporting milk from farm to creamery. The cost of the plastic packaging, or cardboard packaging. The cost of transporting it to the shop. If all of those prices continue to rise, but the milk can only be sold for a fixed price, then somebody starts to take big losses on your milk. And in the medium term, as the underlying price continued to rise, shops would no longer find it profitable to sell milk. Or creameries to supply it. Or farmers, facing surging fertiliser and feed bills, to produce it. With price fixing, somebody always takes a huge loss, in the end. And when people take huge losses, they go out of business.

Nevertheless, price freezing will be popular, because most people don’t think about that. Naturally enough, they think only about the price they are paying, and get angry about it.

Politicians in Ireland don’t really have any workable fixes to inflation: There are only a few proven methods, and all of them are very painful, because they have to either reduce demand, or increase supply. Reducing demand normally means making you poorer – that’s why interest rate rises are on the cards.

All of these decisions ultimately will be made by the European Central Bank. For the most part, all the Irish Government can do is say how much it cares and try some emergency tax cuts. Those who will try to sell you the idea of price fixing should be viewed for what they are: Opportunists who don’t know what they are actually proposing to do.

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