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Dublin: 16 °C Tuesday 2 September, 2014

Damien Kiberd: If prices are deflating, why are we feeling poorer?

Statisticians tell us inflation is a memory but what lies beneath – massive premiums on childcare, health insurance, water tax and more – is a better measure of the pain consumers feel.

Damien Kiberd

AFTER SIX YEARS of ECB-imposed austerity, Japanese style debt-deflation has taken hold in Ireland.

The country owes €205bn to its creditors, households owe another €170bn in private debt but price indices are on the floor.

Inflation won’t allow you to float away from your debts anytime soon.

If you believe the numbers coming from the Central Statistics Office (CSO) and Eurostat, inflation is now simply a memory.

According to the CSO prices in Ireland fell by 0.1% in the year to February.

This matches claims from Eurostat. It says that across the EU in February the annual rate of inflation averaged 0.7%. This is the lowest inflation number for four years and significantly below the target inflation rate of 2%.

A number of countries – Greece, Cyprus, Portugal and Slovakia – also saw prices decline, year on year.

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The figures from Eurostat, with Ireland in context – click here for highest-res image of this graph.

Rock-bottom inflation prompted Dutch bank ING to warn that low inflation was “the new normal”:

It will not make it easy for those (in debt) to reduce their debt overhangs.

Looking at your bank statement you may rub your eyes in disbelief. High prices seem to be cleaning you out at the end of each month, with nothing left over.

So are the official numbers telling lies? Is it simply a case of lies, damn lies and… er, statistics? Or is there, beneath the surface, a massive rip-off underway in which the state piles on extra charges, the effect of which is largely masked by price competition in the private sector?

Pure maths

Ireland’s statisticians do a thorough job. Each month they price 630 goods and services at 53,000 locations before they calculate the latest index.  They are scrupulously fair.

One problem may lie in the manner in which each product or service is ‘weighted’ when the index is being calculated.

Creche and childcare charges could be costing your household €2,000 per month, a massive slice of your net income, perhaps your biggest outlay. But ‘childcare’ has an assigned weighting of 0.6024%. Your local child minder could double his or her fees and it would scarcely cause a blip in the index, a blip that would in any case disappear after a twelve month period.

Zero to infinity

The crash of 2007-2008 has allowed or will allow government to impose several painful price adjustments without provoking the sort of street protest that marked Thatcher’s introduction of the Community Charge in the UK in the 1980s. These include:

  1. Tuition fees for primary degrees at third level were zero, now the ‘College Registration Fee’ is heading rapidly for €3,000;
  2. Water was for many households a ‘free good.’ When the overstaffed Irish Water gets up and running you’ll pay for it just like Perrier or Ballygowan;
  3. Local government services used to be free. Now you allegedly pay for them at a rate of 0.18% of the self-assessed value of your home, say €600 per year on a standard urban dwelling.

Technically, the charge for these three services was zero but is now very substantial.  It’s no wonder you may feel poorer.

Meanwhile, the capacity to pay diminishes. Government has got away with the now permanent USC, a 7% solidarity tax that is universal but not remotely social.

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Students marching to the Department of Finance in 2011, protesting a hike in student fees. Image: Julien Behal/PA Wire.

Your health

Tracking health insurance costs is not easy given the range of packages on offer.  But it’s fair to say that he price of health cover has more than doubled in the last five years, forcing many to drop their insurance altogether.

For many families, health premiums are as burdensome as a second mortgage.  The government determines the price they pay for cover by dictating the way insurance firms are charged for hospital beds.

The Consumer Price Index attaches a weighting of 3.48% to health cover, and says it has increased in cost by 7% in the last year. Is this an adequate measure of the pain now being felt by consumers?

Health cover is essentially a €2bn a year ‘fear tax’ paid by about half the population because they don’t trust the public health system.  Depending on the age of children covered, the standard nuclear family spends €3k to €4k a year on basic cover. That’s a lot of after tax income.

The same people who pay €2bn a year in private health premiums are also paying through their income taxes part of the €13.8bn paid by the state towards the cost of the health system.

The State. Again.

Other areas in which the State soaks the consumer include electricity and gas, which along with other forms of energy are given a weighting of just under 5% in the calculation of the index.

Domestic energy prices have risen by about one quarter since the collapse of 2007. The state energy companies blame global energy markets.

The problem for consumers is that there is no real competition in this area, only a sort of faux competition.  You can switch from one billing company to another but the commercial effect of exercising consumer choice is not similar to the effect of deciding to shop in Aldi and Lidl instead of Tesco or Dunnes.

The price of the energy supplied to your home is controlled by a State regulator, whose presence permits the government to distance itself from criticism in this whole area. The recent results from the ESB suggest that official policy is to permit the big state company to earn super-profits at your expense. The after tax surplus for 2013 was up 23% at €415m.

This level of profit might be justified on the basis that very substantial capital expenditure is required to develop future energy infrastructure.  The ESB did spend €600m on Capex in 2013 but a very large part of the surplus is simply being taken by the State in the form of dividends or by the ESB workforce in the form of pension top-ups.

State charges, private charges

There has not been a great deal of analytical work done on State pricing policy but there is evidence that the State has used the economic crisis to impose new taxes, levies and charges and also to displace the actual cost of running parts of the State from itself to other entities.

The latter is achieved by underfunding bodies like the HSE and the local authorities, forcing them to tap other sources for revenue.

The former is achieved simply by charging for goods and services that were previously supplied at zero cost (beginning with domestic bin collection and moving on).

The resultant economic burden has been significantly masked by a number of factors.

Quite unprecedented levels of competition in the retail grocery, telecoms and aviation sectors have depressed price indices.

Low interest rates – dictated by the ECB, the Fed and the Bank of England – have also helped keep a lid on reported inflation in the current period.

The problem is that these factors may not be sustainable in the medium term. Base rates, global commodity prices, oil and gas prices all move up as well as down.

If you allow the State to engage in price gouging at a time when the overall level of inflation is tolerable you may live to regret it in the future.

Perhaps we need a greater range of more specialised price indices too. Consider for example how you might devise a completely different index for a 30-something double income couple with a boom-time mortgage, two children in childcare and a morbid fear of relying on the public health system.

It hardly bears thinking about.

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