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vimes boots

Explainer: Why is everything more expensive?

In Ireland and across Europe, prices have risen sharply over the past year as economies have reopened.

YOU’VE PROBABLY NOTICED that practically everything is more expensive than it was a year ago.

The price of food, home energy and heating bills, car fuel and a vast range of other consumer items have risen sharply over the past 12 months as the economy reopened, cars and trucks returned to Irish roads and shoppers returned to town and city centres.

Across the Eurozone, it’s much the same story. Consumer prices rose by a record-high 5.1% in the year to the end of January, a first since European Union’s statistics agency Eurostat began compiling data.

In Ireland, prices have risen an estimated 5% over the same period, according to the same set of figures.

While the European Central Bank (ECB) — which is charged with fighting inflation across the euro area — and many economists believe the causes of inflation will begin to moderate this year, anxieties about the impact of inflation on lower-income households are percolating through the economy and the Irish political system.

Campaigners are also increasingly concerned that headline inflation figures used by politicians to set social welfare rates and businesses to set wages aren’t accurately capturing the experience of the less well off.

This has prompted one UK-based campaigner to come up with a new index to measure the impact of the cost of living increases on poorer groups – using a figure from Terry Pratchett’s Discworld series to illustrate it. 

But more on that later. Let’s start with the basics: 

What is consumer price inflation?

It describes a situation where the average price of a basket of consumer goods increases over a particular timeframe, be it a year or a month or whatever.

As prices increase, the purchasing power of a given currency declines — in other words, money buys fewer goods than it did previously.

Now, there are various general theories of inflation and how and why it happens. The most famous of them is probably economist John Maynard Keynes’ idea of demand-pull versus cost-push inflation.

Demand-pull inflation — sometimes described as a situation where too much money is chasing too few goods around the economy —  occurs when overall demand within an economy is stronger than the overall supply of goods, which pulls prices and the cost of living upwards.

Cost-push inflation, meanwhile, occurs when extra production or input costs incurred by businesses are passed onto consumers.

What type of inflation are we experiencing right now?

A bit of both, arguably.

In Ireland and across pretty much all of the world’s advanced economies, consumer demand has dramatically rebounded in the past year, pulling up prices.

That’s happening for a few reasons. The unleashing of pent-up demand after months of lockdown, the unwinding of household savings built up during periods of heightened public restrictions; and the propping up of household and business incomes through government supports over the past year have all contributed.

Without going into too much detail, central banks have also played a role in fueling demand and, in turn, inflation.

By keeping interest rates at record lows as well as printing and pumping money into the Eurozone economy through its Pandemic Emergency Purchasing Programme (PEPP), the European Central Bank has very effectively stimulated the Eurozone economy by making cheap credit available to governments, businesses and households alike.

But more importantly in Ireland and the single currency area in general, the pandemic also created various global crises in production and in the transport of goods, which have heaped costs upon businesses. An energy crisis sweeping across Europe has also conspired to push up the wholesale price of natural gas, upon which the continent is reliant for about 42% of its electricity supply.

Screenshot 2022-02-03 at 11.48.50 Graph showing that rising energy prices made the single largest contribution to Eurozone inflation in the 12 months to the end of last month. Eurostat Eurostat

Those costs are also being passed onto Irish consumers in the form of higher prices in the shop, at the pump and in their household bills, as The Journal has explored over the past year: 

It’s also worth bearing in mind that Irish and European prices declined sharply (you might even say artificially) in 2020 with people stuck at home for large swathes of time and unable to spend money.

As a result, there was always going to be some kind of rapid natural rebound in price levels as economies reopened. However, that rebound has exceeded most expectations with the annual rate of inflation hitting all-time or multi-decade highs in the Eurozone and Ireland respectively in recent months.

That’s the boring stuff. How does Terry Pratchett come into it?

Well, as we touched on, price increases erode the purchasing power of money, meaning it buys fewer goods than it did previously.

This is obviously particularly challenging for lower-income households. It’s also a worry for anyone on a fixed income like a pension, for example.

With inflation biting properly, really for the first time in decades, there is a growing sense that the Consumer Price Indexes (CPIs) used by statisticians don’t fully reflect the disproportionate impact of inflation on people who fall within lower income brackets.

In response to this, UK-based anti-poverty campaigner Jack Monroe has created a price index of her own.

“Infuriated” by the fact that the UK’s equivalent of the CSO, Office for National Statistics (ONS) CPI “grossly underestimates the real cost of inflation as it happens to people with the least”, Monroe pointed out at the price of ‘value’ product ranges in British supermarkets had soared in the past decade.

The ‘Vimes Boots Index’, as Monroe’s version is called, is named for a character in a novel by Discworld author Terry Pratchett called Sam Vimes.

In the book Men at Arms, Vimes, commander of a police force known as the City Watch, explains the reason the “rich were so rich was because they managed to spend less money”. This is by dint of being able to afford more expensive, better-made goods — boots, for example — that last longer than cheaper goods, which have to be replaced more frequently.

“Take boots, for example. He earned thirty-eight dollars a month plus allowances. A really good pair of leather boots cost fifty dollars. But an affordable pair of boots, which were sort of okay for a season or two and then leaked like hell when the cardboard gave out, cost about ten dollars. Those were the kind of boots Vimes always bought, and wore until the soles were so thin that he could tell where he was in Ankh-Morpork on a foggy night by the feel of the cobbles.”But the thing was that good boots lasted for years and years. A man who could afford fifty dollars had a pair of boots that’d still be keeping his feet dry in ten years’ time, while a poor man who could only afford cheap boots would have spent a hundred dollars on boots in the same time and would still have wet feet.”

Last week, Monroe received the Pratchett family’s blessing to use the character’s name. The ONS has also said it will change the way it collects and reports data to “take into consideration a wider range of income levels and household circumstances”, Monroe tweeted last week.

Do we have the same problem in Ireland?


The CPI is calculated based on the average price of a basket of goods and services. But as Sinn Féin finance spokesperson Pearse Doherty put it last week, “every household spends differently”.

If you are renting, for example, you probably spend proportionately more of your income on housing costs — which have been rocket-fuelled by low levels of supply, construction disruptions since the start of the pandemic — than someone who owns their home.

Speaking to The Journal this week, Ciarán Nugent, an economist with the Nevin Economic Research Institute (NERI), told The Journal that the CPI was “essentially flat” for many years before the pandemic despite the fact that housing costs were rising rapidly.

“So the CPI obscures the real costs of living for different groups and especially different groups based on tenure status, ” he said.

You had years there where rents were going up 7-9%, and the CPI remained basically flat. Anybody can make sense of that — it’s not capturing the lives and the cost of living challenges of certain groups.

“When food and energy prices increase at a much greater pace, the proportion of a person’s income that is spent on those is greater for people on low incomes,” St Vincent De Paul’s Head of Social Justice and Policy Dr Tricia Keilthy told The Journal last week.

“In real terms, what that means and what we’re seeing is that people are having to cut back.”

To reflect the uneven impact of surging inflation,  some campaigners want a clearer breakdown of inflation across income and housing categories. This, they argue, will give lawmakers a better sense of how to tailor policies to cushion the blow of rising prices on the less well-off.

Responding to The Journal last week, the CSO is considering how best to provide this kind of information.

In the meantime, the CSO will also conduct its first Household Budget Survey since 2015/16 over the course of the next two years, allowing it to update the CPI basket and weights at the end of next year. 

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