February 8, 2006
Do our inflation figures reflect the cost of living? If the true rate of inflation is much higher than official figures state, then any wage increase secured by this week’s partnership talks will not make you feel much richer.
An obvious conundrum in Irish economics is the fact that the rate of recorded inflation – the cost of living which determines your wages – seems to be very low compared to the rate at which we fork out money every week.
For example, according to government figures, average prices in Ireland have only increased in total by 12pc since 2001.
Can this be true? It certainly does not feel like it.
Yet, today’s partnership talks – which will set your wages for next year – base their wage calculations on figures that say prices here rose by only 3.6pc in the past twelve months! This figure doesn’t seem right and for many of us, flies in the face of common sense.
It sounds like the monetary equivalent of statements that tell us we have a “world class” health service. In the past, communist countries, such as East Germany, used to doctor official statistics, rendering them meaningless.
Are we doing the same? A reasonable way of measuring inflation in any country is by the basic yardstick of how far your cash goes in different countries.
As most of the continent uses the euro, this is a relatively simple exercise.
What happens to the buying power of your euro when you come back from holliers? Few would argue with the basic proposition that money goes farther on the continent than it does here. We get better value for money.
When you return from Spain there is a sudden devaluation of your money – despite it being the same currency. Things that cost ï¿½5 there, can often cost a tenner here.
If we are to have any faith in the statistics upon which we base our wage demands, we would expect that this disparity in prices and value would be captured in government inflation figures.
Given that things are cheaper in Spain, inflation must be much lower there than in Ireland – which would explain why everything is cheaper in Barcelona than Dublin. (It might be cold comfort after you have paid close to a fiver for a coffee at Dublin Airport, but at least you have the psychological pleasure of knowing that the official statistics feel your pain.)
But according to EU statistics, our prices are actually falling relative to those in Spain. Most of us suspect that this is nonsense and, even more ludicrous, is the fact that official statisticians claim that Irish prices have been falling relative to Spanish prices every year since 2001.
We have all heard the expression, “lies, damn lies, and statistics” and with respect to the cost of living in Ireland, this is apt. The major question is whether we are being sold an expensive pup by the Government, the trade unions and the employers’ representatives?
Before we arrive at any conclusion, we should look at the rest of our EU partners lest for some reason Spain is just quirky. But here again, after examining the figures, we get no satisfaction.
For the past five years, official figures claim that the cost of living here is hovering around the EU average. So our official statistics agency contends that we are no more expensive than the European average.
Yet Ireland has, over the same period, also become the second most expensive country in the Union. Last week, figures showed that Dublin had jumped from eighth to third most expensive city in the Eurozone – a jump of six places in five years.
This does not make sense. One of these statements has to be false. Either, our inflation rate is the same as other countries as the official data suggest, in which case Ireland could not become more expensive or, our inflation figures are a myth.
Worse still, an expensive myth because it is leading us into a poverty trap.
Poverty trap? In the most dynamic economy in Europe? Surely this language is inflammatory? Well not really.
If our inflation figures are not capturing the real cost of living, if they are telling us one thing but our daily experience is screaming out another, then pay rates based on any such measurement are meaningless.
In addition, dubious inflation figures might explain why thousands of Irish people in good jobs – the working middle classes who are told that they never had it so good – feel broke.
When you consider what is the single biggest cost in Ireland – the answer is always house prices. As this paper pointed out last week, Dublin house prices are rising by ï¿½230 per day.
But it might come as a surprise to you that the inflation rates that the Government is using to measure the Irish cost of living do not include the price of houses.
So the one overwhelming price that dominates is actually omitted from official price figures. The price of houses, more than any other price, is the benchmark against which many of us gauge whether we are doing well or not.
In addition, as close to 80pc of all the money we borrowed last month was gobbled up in property, it dictates our consumption patterns.
If house prices, more than any other, dominate our common sense view of the cost of living, surely house prices should be factored into any wage deal? If not, we are living in two parallel universes: one is the “virtual” world constructed by the Central Statistics Office and used in partnership talks; the other the “real” world where we all live.
The virtual world does not include house prices to calculate inflation.
Instead, mortgage rates – based on the rate of interest – are included.
This has led to an utterly Kafkaesque development over the past few years whereby, in the real world, the price of houses has sky-rocketed, yet the cost of housing as measured by the “virtual” world’s rate of inflation, has been actually falling because interest rates have been falling.
This has implied ever lower wages being negotiated for us by “Partnership” relative to the real cost of living. In the process, this is increasing the sense of impoverishment of working people.
The upshot of this carry-on is that while average house prices in Dublin rose by an extraordinary ï¿½230 per day last year, average wages rose by ï¿½5 a day – before tax.
And the authorities are trying to tell us that wages are running ahead of the cost of living! But if we are falling behind, why has the system not ground to a halt? Well, this is because the vacuum between wages and the cost of living has been filled by borrowing.
The yawning gap between take home pay and after-tax spending has been plugged by overdrafts, re-financings, hire-purchases, term-loans and credit cards to the tune of 140pc of GDP.
So at a stroke, the State has mortgaged the future to sustain the present illusion with the help of cheap credit. One way of rectifying this and clarifying the financial picture would be to include house prices rather than mortgage rates into the inflation figure. This would, sensibly, reveal that inflation is considerably higher here than the official figures suggest.
A further measure, if the Government were really worried about the welfare of the electorate, might be to index wage increases to house prices. The higher house prices, the higher the wages.
Thus the past few years of double digit house price increases would ratchet up wages to compensate. But this has not happened.
Why? Ask yourself why our State does so little to prevent the price of houses rising? Why does it do so little to protect our one million or so adult citizens under the age of 29 who are being squeezed by high rents and impossible prices?
Why does the State preside over the massive transfer of wealth from young renters to old landlords? Why does the State – through constructs like “Partnership” – reward old home owners over young houses hunters? Why is it sacrificing the under thirties – the very generation who will drive the country forward – on the altar of property developers’ profits?
The reason is simple: those who run the country realise that credit is the safety valve, allowing them to reconcile the competing interests of keeping the electorate docile, while keeping the very powerful sweet.
By telling people the truth about inflation, they would blow apart a cosy consensus which has kept them in power for years.
As long as people are prepared to get into debt for ludicrously expensive houses, the State can hide its incompetence and dress it up as a product of economic success – which it is not. If we told the truth and indexed inflation and wages to house price increases, the whole deck of cards would come falling down.
Irish wages would rise commensurate with the real cost of living. This would eventually force unemployment upwards as the country became uncompetitive.
Ultimately, the Government would be voted out. But political expedience governs the day.
Instead of facing up to the political reality and the social cost of rampant house price inflation, the Government has opted to hide behind phony figures and opt for the palatable alternative of personal debt.
In conclusion, house price indexation is not going to happen. We will get into debt instead. State responsibility has been abdicated entirely. The upshot is that the Government will stay in power, the charade will continue.