Two views of Irish prices

Everyone loves a comparison.  Figures from the CSO today have been reported with the headline:

Prices in Republic 35% above EU average, CSO figures show

The cost of basic products and services in the Republic was 35.4 per cent higher than the EU average in 2019, and the second highest after Denmark, a new report by the Central Statistics Office (CSO) shows.

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The CSO’s report shows that price levels here were 25.9 per cent above the EU average back in 2009. This dipped to 21.1 per cent above the EU average in 2011 as the economy entered into a recessionary period, before increasing again in recent years (to 35.4 per cent in 2019).

And here is a chart illustrating these figures.

The price level for the EU27 as a whole is set equal to 100 for each year with the Irish price level in 2019 estimated to be 35.4 per cent higher than this.  Denmark is also shown.   In 2019, Ireland had the second-highest price level for household final consumption expenditure in the EU, after Denmark.

So, this is one view of Irish prices.  In the last ten years Ireland’s price level has risen faster than the price level of the EU27 as a whole moving from being 20 per cent higher in 2010 to 35 per cent higher in 2019.  Irish prices started off higher and became even higher again.  Relative to EU’s highest price level, we can see that the Irish price level was significantly below the Danish price level in 2010 but has converged on the Danish level over the past decade.

Here’s a second view.  This is from the harmonised index of consumer prices (HICP).  This is what is used to measure inflation across the EU.  It does not give relative price levels across countries but gives an estimate of relative price changes within a country (i.e. the inflation rate).

The indices for Ireland, Denmark and the EU27 are set equal to 100 for 2009 and the relative prices changes that occurred within each are shown by the changes from this point.  And it can be clearly seen that HICP inflation in Ireland has been much lower than for either Denmark or the EU27.

Since 2009, Danish consumer prices are up almost 12 per cent while for the EU27 as a whole there is an estimated price rise of over 15 per cent.  On the other hand, Irish prices in the HICP are up less than four per cent on 2009.

So there you have it.  Two different views.  The price level indices for household final consumption expenditure show that the Irish price level has risen by about 10 percentage points relative to both the price levels of Denmark and the EU27 (when the EU27 is set equal to 100).  On the other hand, the harmonised index for consumer prices shows that inflation in Ireland since 2009 has been eight percentage points lower than in Denmark and 11 points lower than the inflation for the EU27.

This is not to suggest that there is something wrong with either of these views of Irish prices.  The price level for household final consumption expenditure and the harmomised index of consumer prices are different things.  And as the Irish Times point out a lot of the action is linked to housing:

“The CSO’s Measuring Ireland’s Progress 2019 study suggests the primary reason for the higher cost of living here is housing.”

If you want to take, a very deep, trip into the weeds to see how housing can explain some of the divergence between the charts above see here.

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Growth of real wages in the EU15 since the start of 2014

Eurostat published Q3 2017 nominal hourly labour costs data earlier in the week.  Adjusting for inflation, using the Harmonised Index of Consumer Prices, we see the following picture emerge for the wages and salaries component of real labour costs since the start of 2014:

Using this approach it can be seen that Ireland has had the second-highest increase in real hourly wages since the start of 2014.  This might look good in relative terms but in absolute terms the increases remain modest.

Here is what emerges if we look at annual growth rates (smoothed over four quarters).

There are maybe two ways to interpret this.  The first, is that Ireland has the highest growth in real hourly wages in the EU15.  This growth has accelerated slightly in recent times but not massively so.  The second is that the growth of real wages has slowed in almost all EU15 countries with 11 of the 15 having a slower growth rate of real wages compared to a year ago.

The reason for this has not been a slowdown in nominal wage growth, if anything this has slightly picked up with 11 countries showing a higher nominal wage growth in Q3 2017 compared to a year earlier.  The arithmetic mean for the EU15 has gone from 1.1 per cent to 1.5 per cent.  Ireland too has seen an increase in nominal wage growth but not unusually so.  The smoothed average growth has gone from 1.2 per cent in Q3 2016 to 2.1 per cent in Q3 2017.

The reason for the slowdown in real wage growth across the EU15 has been the uptick in inflation.  The annual inflation rates from the HICP applied to the above nominal wages changes went from a mean of 0.3 per cent in Q3 2016 to a mean of 1.4 per cent in Q3 2016 with the UK, particularly showing a rapid rise in inflation. 

It’s all to with the second derivatives.  Inflation is rising faster than the increases in the growth of nominal wages hence real wage growth is slowing down – for most countries.

Ireland is one of the exceptions.  The increase in nominal wage growth over the past year in Ireland (0.9pp) is slightly above the simple average increase seen across the EU15 (0.4pp).  Inflation, though, has been non-existent in Ireland for an extended period now and remained close to zero throughout the period shown above.  Over the past year Ireland has had the smallest increase in inflation in EU15 and now has the lowest rate of inflation across the group – and this is including the large contribution made by the rapid increases in private rents. 

So put together our modest, though increasing, growth rates in nominal wages with our low rates of inflation and we get the result that Ireland has the fastest growth of real hourly wages in the EU15. For now anyway.

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Core Inflation Unchanged

The overall annual CPI inflation rate dipped down to –0.6% in January but the ‘core’ rate (excluding energy products and mortgage interest) was largely unchanged (0.8% in December versus 0.9% in January).  This was the result of the new inclusion of water and sewage charges to the CPI which added 0.4pp to the annual rate in January.

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Core inflation unchanged

Overall inflation may have dipped into negative territory for the first time since early 2010 but if we strip out energy products (-5.5% in the year) and mortgage interest (-10.6% in the year) which between them count for 15 per cent of the overall index then ‘core’ inflation was little changed in December.

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Core inflation at 0.9%

Today’s CPI release from the CSO shows that overall consumer price annual inflation remained at 0.2% in January.  The monthly drop of 0.5% matched the 0.5% drop recorded in January last year.

If we strip out energy products and mortgage interest (equal to around 15 per cent of the overall index) we get a measure of ‘core’ inflation.  This rose slightly in January but remains below 1%.

Upward pressure on Irish inflation is coming from services.  Services excluding mortgage interest are up 3.0% in the year.  Services are:

Electricity, gas, telecommunications, alcoholic beverages consumed on licensed premises, meals out, housing, rent, mortgage interest repayments, insurance, public transport, entertainment and recreation, education, household services and miscellaneous services including childcare, social protection, package holidays and other services.

As we examined before most of the price increases in these sectors can be explained by excise duty increases (alcohol), regulated price increases (electricity, gas, public transport), property taxes (housing), lower tax relief and higher charges (health insurance) and higher fees (education).

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Minister Calls for Rent Controls

The front page of the first Irish Examiner of 2014 led with calls from Housing Minister Jan O’Sullivan for the introduction of rent controls. Click to enlarge.

The article is here.  It is not clear what type of rent controls might be examined but some mechanism linked to the CPI is alluded to with Jan O’Sullivan quoted as saying:

“There is a general problem on the cost of private renting. We should look at examples in other countries where rents are related to increases in consumer price indexes, where rents can’t be increased more than the cost of living increases.”

We can get data from the CSO on actual rents paid by tenants to private landlords back to the start of 2003.  This item has a weight of 4.35 percent in the overall index which naturally enough is also available from that time.  Here is what both series look like indexed to 100 in January 2003.

Compared to the start of 2003 the overall CPI is now around 20 percent higher.  Actual rents paid by tenants to private landlords have been rising recently (the annual increase is currently 8.2 percent) but the index is at the same level it was at in January 2003.

Private rents have shown periods of rises and falls over the past 11 years.  Most notable was the 25 percent drop from the first quarter of 2008 to the first quarter of 2010.  The Q3 2013 Daft Report on the Rental Market records similar patterns to those shown above on a regional basis (though only has data from the beginning of 2006).

In the chart above the two series are set equal to each other in January 2003.  They got there by different means but the two series were again almost equal to each other at the end of 2007.  Since then they have diverged significantly but are showing signs of converging again though it would take a further 20 percent increase in private rents from where they are now for the rent index to again equal the CPI (assuming it was unchanged).

There may be calls for rent controls now when rents are rising faster than the CPI but would a counter-factual with rent controls in place have seen rents fall by 25 percent in two years when the overall CPI fell by less than 8 percent over the same period?  Will rent controls be effective only on the way up and not on the way down?

Finally, here is a chart comparing private and local authority rents (again with both set equal to 100 in January 2003).

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Inflation is near zero but not in all sectors

Today’s CPI release from the CSO puts the headline rate of inflation at +0.3 percent.  However, that is being dragged down by mortgage interest (-6.0 percent) and energy prices (-2.8 percent).  These make 15 percent of the overall index.  If we strip those out to get a measure of ‘core’ inflation we see the following.

Core inflation is running at around +1.0 percent but this in itself is driven by some fairly particular price increases.  Details of these are below the fold.  The pattern of where the price increases in the Irish economy are coming from should be easy to identify.

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Alcohol Prices – Ireland is 2nd highest in EU

A minimum price for alcohol in Ireland remains on the agenda (though it’s legality is still uncertain).  Data from Eurostat show that Ireland already has the second highest price for alcohol in the EU – at more the 60% higher than the EU average.

The latest data from Eurostat is for 2012 and is available here.

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Inflation approaches zero

Yesterday’s CPI release for August from the CSO shows that general inflation over the past 12 months has been very low.  The following chart has the 12-month changes in the overall CPI and in a ‘core’ measure of inflation (the 85% of the index excluding mortgage interest and energy products).

Core inflation is running slightly higher than the overall inflation rate as both mortgage interest (-5.9%) and energy products (-0.7%) showed price declines over the year.

The core deflation that was seen for two years up to the start of 2011 and the relatively low level of inflation since then has resulted in a substantial narrowing in price differences between Ireland and other countries. 

Here is the Harmonised Index of Consumer Prices (HICP) for Ireland the EA17 since 2002. [The chart says nothing about relative price levels as both indices are set to 100 in January 2002; it merely allows differences in relative price changes to be seen.]

Here is a similar HICP chart for Ireland and the UK showing that the relative gap over the last four years or so has been even greater.

Eurostat does provide some comparative price level data.  The following chart shows comparative prices for HFCE (household final consumption expenditure) for the UK and the EZ17 relative to Ireland (=100) for the past decade.

In all the years shown Ireland has had a higher price level than the other two areas.  The gap to prices in the Euro Area was greatest in 2008 and has narrowed since then.  The gap to UK prices was widest in 2009 and the rate of convergence has been even greater.  As the inflation data above has shown this has continued into 2013 and, although Ireland still has higher prices, we can expect the lines to get closer still in subsequent releases.

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Core inflation edges up

Although the overall inflation rate from the April Consumer Price Index was unchanged at 0.5% what we have termed the ‘core’ rate of inflation edged up.  The measure excludes mortgage interest (down 6.8% in the year) and energy products (almost unchanged in the year with a drop of 0.1%).  This represent about 15% of the overall index.  The overall and ‘core’ inflation rates for the past few years have been like this.

Although it increased in April, at 0.9% the core rate of inflation is still below the levels it was at for most of the past year.  Finally here is an interesting chart from Danske Bank which compares the Irish Harmonised Index of Consumer Prices (HICP) inflation rate, which also excludes mortgage interest, with the euro area average.

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Core inflation rises again

After more than two and a half years where the upward pressure on inflation was coming from Energy Products and Mortgage Interest, the past few months have seen the overall inflation rate and the core inflation rate converge (while also increasing).

Core inflation is measured by excluding the impact of energy products and mortgage interest from the overall CPI.  These account for 17% of the overall CPI basket so ‘core’ inflation here is the remaining 83%.   It can be seen below that this measure of inflation is now running at its highest rate since the start of 2009.

In August both overall inflation rate was 2.0% per annum with the core rate just above this.  The Energy Products category recorded 10% inflation over the past twelve months while Mortgage Interest in the CPI is now 13% lower than it was this time last year (this followed from Mario Draghi’s almost immediate decisions to reverse the 0.5 percentage points of interest rate increases introduced by Jean Claude Trichet in the summer of 2011).  The weights for energy products (11.4%) and mortgage interest (5.6%) in the CPI basket of goods means that the inflation rate for these combined is equal to 1.8%. 

So what is pushing up the rate of inflation.  Here is table from the CPI Detailed Sub-Indices release with categories that have a CPI weight greater than 0.25% and an annual inflation rate greater than 2.5% (fruit and vegetable juices ‘passed by compensation’ to meet the entry criteria).

An equivalent table with inflation rates of –2.5% or lower is below the fold.

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Core Inflation Rises

Yesterday’s Consumer Price Index release for July from the CSO shows the overall rate of inflation falling for the fourth month in a row.  However, the source of inflation in Ireland is slowly beginning to shift.

July marked the since the start of 2010 that the overall inflation rate was equal to the ‘core’ inflation rate.  In this instance the core inflation rate is the 85% of the overall index that excludes energy products and mortgage interest.

The overall index is being pulled down by reductions in mortgage interest (particularly for trackers with ECB rate now at 0.75% compared to 1.50% this time last year).  Excluding mortgage interest inflation is still running at 2.3%.  Since March the overall rate of inflation has fallen from 2.2% to 1.6%.  However there has been no significant drop excluding mortgage interest is just from 2.4% in March to 2.3% now.

Annual inflation is now being driven up by the following products (number in brackets is the expenditure weight in the CPI showing the importance of the price change):

• Tobacco (2.6%) +6.5%
• Private Rents (4.4%) +2.0%
• Housing maintenance materials (0.3%) +3.9%
• Non durable household goods (0.7%) +2.3%
• Electricity (2.3%) +14.5%
• Gas (1.2%) +18.1%
• Health (4.6%) +0.7%
• Motor fuel (6.1%) +6.3%
• Motor tax (1.2%) +10.8%
• Bus and taxi fares (1.0%) +6.4%
• Air passenger transport (1.6%) +3.0%
• Newspapers, books and stationery (1.5%) +1.7%
• Package holidays (0.7%) +3.3%
• Third-level education (1.6%) +13.5%
• Licensed premises (6.5%) +1.7%
• Health insurance (2.9%) +15.3%
• Motor insurance(1.7%) +1.7%

There are numerous categories that have seen price declines as well and these are in the detailed sub-indices from the CPI.

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Core inflation jumps higher

This morning’s release of the March Consumer Price Index by the CSO shows that the headline rate of inflation edged higher rising from 2.1% in February to 2.2% in March.  A measure of “core” inflation excluding mortgage interest and energy products reveals a different pattern.  The measure of inflation represents about 85% of the overall index.

Core inflation jumped from 0.7% in February to 1.3% in March and this is the highest this measure has been since January 2009.   Annual inflation in mortgage interest turned negative for the first time in almost two years in March and the contribution of rising energy prices to the CPI also fell slightly.

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Inflation edges higher

Today’s CPI release from the CSO reports that the headline rate of annual inflation rose from 2.8% in October to 2.9% in November.  As has been the case since inflation returned to positive territory in the middle of 2010 this continues to be mainly driven by just two categories; energy products and mortgage interest. 

The price of energy products are up 13.7% in the year, while the price of mortgage interest is up 17.8% in the year.  These make up 15% of the index and removing them gives a measure of ‘core’ inflation.  Core annual inflation in November was 0.66%, up from 0.55% in October.

On mortgage interest, it is important to realise that the CPI measures the price of mortgage interest and not necessarily the cost.  The price of mortgage interest change but the cost to most households may not change if this change is not also applied to existing mortgages.  This has happened in Ireland for the past 18 months or so.  Mortgage variable rates have been increasing far more than tracker rates and these form most of the mortgage interest price in the CPI. 

The mortgage inflation rate in the CPI overstates the average increase in mortgage rates as it reflects mainly the rates that have been rising by more(standard variable rates) and largely omits the rates which rose only slightly (tracker rates).  Almost half of all mortgages are on tracker rates.  This is explained in a Information Note to the CPI release.

In line with normal practice for a fixed base price index, the current approach to measuring mortgage interest in the CPI reflects the situation in the base reference period December 2006 when the standard variable rate was dominant. Subsequently, tracker mortgages have become more popular. This did not give rise to any difficulties while the standard variable and tracker mortgage interest rates moved broadly in line with one another, which would be the normal expectation. However, the decoupling that has taken place since August 2009 has resulted in dramatically different trends emerging. For example, between September 2009 and September 2010 the standard variable rate increased from 2.93% to 3.66% whereas the tracker rate did not change. The Mortgage Interest component of the CPI, which is largely determined by the trend in the standard variable rate, increased by 25.1% as a result and contributed +1.25% to the overall change in the All Items index. It is crudely estimated that the latter impact would have been reduced by between 0.2% and 0.5% had the Mortgage Interest component been calculated on a current weighting basis. Users should take this “weighting effect” into account in interpreting the mortgage interest related movements in the index.

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Core inflation stays low

The headline rate of inflation from today’s Consumer Price Index release is 2.8%.  However 2.33 percentage points of that are accounted for by just two categories: energy products and mortgage interest.  These make up about 15% of the index.   Mortgage interest is up 18.1% on the year and energy products are up 13.4% on the year.

The remaining 85% of the index, which we are using as a measure of ‘core’ inflation, contributes just 0.47 percentage points to the overall inflation rate and is showing annual inflation of 0.55%.

The headline rate is inflation is nearly 3% but outside of mortgage interest (and it is only standard variable rates that are picked up in the index) and energy products inflation remains low.

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Core inflation rises slightly

Overall annual inflation from September’s Consumer Price Index shows a jump from 2.2% in August to 2.6% in September.  If we look at the 85% of the index that excludes mortgage interest and energy products the increase was from 0.3% to 0.4%.

Although the headline rate of inflation is 2.6%, the majority is provided by two categories that make up 15% of the index.  Both energy products and mortgage interest contributed 1.1 percentage points to overall rate, leaving 0.4 percentage points for the remaining 85% of the index.

Here are the contributions for all categories in the CPI.

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Reduced VAT and price changes

The July CPI is also the first the picks up the effect of the reduced VAT rate of 9% on the supply of certain goods and services. Details here.  We can use the CPI Detailed Sub-Indices to gauge some of the effect of the VAT reduction. The results are mixed.

The price changes vary from a 4.1% drop in the price of newspapers (the full VAT reduction was passed on) to a 0.9% increase in the price of accommodation services.  Prices for cinema and hairdressing dropped by around 2%, with the cost of eating, canteens and takeaways all falling by less than 1%. 

Although the reduced rate of VAT is supposed to apply to cultural admittance and sports participation the price of both was unchanged in the month, though their prices are down more than 5% on the year.

All told, the categories listed here fell by 0.79% in the month and contributed to a monthly fall of less than 0.1% in the overall CPI.  Outside of newspapers it is hard to find significant evidence of the VAT reduction feeding through to price reductions.

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Core inflation edges down

According to the July release of the CSO’s Consumer Price Index the headline rate of inflation stayed at +2.7% for the third month in a row. Prices on the month were unchanged.  Our measure of “core” inflation (the 85% of the index excluding energy products and mortgage interest) slipped down on the month.

 

Core inflation slipped from +0.5% in June to +0.39% in July.  Of the headline rate of 2.7%, 1.4 percentage points or more than half, is contributed by mortgage interest.  Energy products contributed 0.9 percentage points to the headline rate.

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Core inflation edges down

The June Consumer Price Index shows little change in inflation. The overall inflation rate remained at +2.7%, the level recorded in June, while our measure of core inflation, excluding energy products and mortgage interests, fell slightly to +0.5%.

Our conclusion from May remains valid.

The measure of core inflation used here accounts for around 85% of the total index so those who are suffering from rising prices are:

• those with standard rate mortgages with mortgage interest in the CPI (weighting 6.66%) up 24.1% on the year (we can also expect a further increase in ECB linked tracker mortgages over the coming weeks), and
• those who purchase a lot of fuel with energy prices in the CPI (weighting 7.77%) up 11.6% on the year.  These are particularly drivers, as petrol and diesel make up about 50% of the energy subgroup and are up 13.8% on the year.  See here.   The other half of the energy sub-group (electricity, gas, liquid and solid fuels) is also rising up 6.8% on the year.

So somebody who has a standard variable rate mortgage and drives a lot is facing significant price increases compared to 12 months ago.  Outside of these particular cases the average inflation rate is quite low with the other 85% of the index rising only 0.5% on the year.

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Irish and UK CPIs

Here is a quick update of a previous post which compared the movements of the Consumer Price Indices for Ireland the UK since January 2007.

As would be expected the pattern has not changed much though the Irish CPI has being edging upwards since the start of the year.  Since January 2007 the Irish CPI has risen 4.1%, which is also the same rise since January 2010.  The UK CPI has risen 15.8% since January 2007 and is up 6.3% since January 2010.

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