February 8, 2006

State bets the house in big lie on inflation

Posted in Celtic Tiger ·
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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 �5 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 �230 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 �230 per day last year, average wages rose by �5 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.


  1. Brian

    Why has it taken so long for an Irish economics commentator
    to state the obvious? We have been deceived and lied to by
    the Government and it’s agencies for decades. We are
    constantly beguiled by State, Semi-State, quasi-state, non
    government, economic and social research institutes,
    business and employers confederations, small and medium
    business groups, chambers of commerce, farmers organisations
    who bleat about how difficult life is for them and that
    having to pay people to work for them is just not affordable
    and any increase in pay or improvement in conditions will
    render them and Ireland “uncompetitive” and will result in
    the loss of thousands of jobs.
    We have heard this every year since the first of the
    so-called partnership agreements was signed back in 1987.
    The Partnership Agreements were a confidence trick
    perpetrated against the taxpayers of Ireland. When I say
    taxpayers I mean PAYE taxpayers.
    The partners in these agreements were the Government. The
    Employers, the Farmers, the Religious Organisations who
    claimed to represent the poor and lastly the Trade Union
    groups who represented their members and claimed to also
    represent all workers.
    When the first agreement was signed, no less than 86% of all
    tax revenues were contributed by the PAYE sector.
    The whole thing was stacked against the PAYE sector in this
    way.
    The Partnership Agreements always claimed to meet and cover
    “cost of living index”, well just about.
    If the official “cost of living index” was corrupted and the
    inflation rate was dishonestly calculated then a substantial
    saving was made by the employers in every pay agreement.
    This fact was known by the Government, the employers and
    also by the Trade Unions.
    Why would the Trade Unions consistently sell out their own
    members in this way?
    Just look at the number of former executives of Irish Trade
    Unions who have been rewarded by successive Governments with
    Executive and Board positions in semi-state organisations,
    particularly The Labour Court. This was their “golden
    handshake” for delivering their members into partnership.
    Prime Minister Bertie Ahern’s courtship of SIPTU, the
    countries largest Trade Union ,has been continuous since
    his days as Minister for Labour in the early eighties. SIPTU
    always puts up a show of non-conformance before every new
    agreement but ultimately signs up. The pattern is very clear
    now
    In the past eighteen years the earning power of PAYE
    taxpayers has actually fallen and the losses have been
    disguised by the falling interest rates and the availability
    of relatively cheap credit.

    The arrival on our shores of unlimited cheap labour from
    Eastern Europe now render the current talks on a new
    “Agreement” to the level of a PR exercise by the parties
    involved and a platform for Mr Ahern to promote himself as
    the worker’s friend and set himself up for another bid as
    Taoiseach in the next government.

  2. rory byrne

    David, your point about the cappuchino illustrates one
    misconception regarding inflation measures. They attempt
    to measure price increases of essential goods. Cappuchinos
    in Dublin Airport do not count – bring a flask of nescafe
    next time. With the added competition in food retail in
    recent years essential goods have actually stagnated in
    price or even come down. Shopping for essentials has never
    been cheaper if you’re willing to travel to Aldi or Lidl.
    Even drink is dirt cheap if you’re willing to sit at home.
    Clothing is also cheap(er) through competition.

    Peoples perceptions of inflation seen to be house prices
    and luxury goods. this is incorrect. Irish people are too
    snobbish in their purchasing.

    The idea of factoring house prices into inflation indexing
    is laughable. This will do nothing but create further
    inflation, particularly in housing.

    Cost of housing is a serious concern for Ireland – and is
    exasberated from being out of sink economically with the
    rest of the eurozone to which our interest rates are tied.
    mortgages are too cheap and with near full employment and
    generous lenders it’s easy to see why prices have risen.

    The Irish Government, having seen its electorate vote
    itself into the euro, can do nothing about the cheap cost
    of credit. Best case scenario for Ireland is a big upturn
    in european inflation prompting a large increase in the
    repo rate by the ECB casuing a commensurate increase in
    morgage repayments. The bubble needs to burst – better
    sooner rather than later. At that stage the euro-
    experiment will be considered an unmitigated disaster. We
    should never of joined with Britain.

    On your “transfer of wealth from young renters to old
    landlords”. Rental is a fact of life – Irish people have a
    real hatred of renting unmatched anywhere in Europe.
    Renting should and will become more common in Ireland.

  3. Pete

    That’s fightin’ talk, David. Are we going to see this one
    in the SBPost?

    As far as I know, no country includes house prices in
    their inflation calculations, but most do include the cost
    of renting, which is a far more meaningful measure of the
    cost of real-world housing than the mortgage rate
    calculation that Ireland uses.

    To demonstrate the nonsense of government stats, here’s an
    excellent just-published report on house price
    affordability : http://www.demographia.com/dhi-ix2005q3.pdf
    Using Irish government stats, they show the median house
    price in Dublin as being 304K euro. How wrong can you be?

  4. David Mc Williams

    Thanks Pete, I’ll check that website out. Thanks David

  5. Aesop McFadden

    The people elect the government and as the old saying goes you get the
    government you deserve. What does the current Governement tell us about
    the Irish electorate? We favor profits over sustainable development, self
    interest over public good, status quo over progress. The Government hides
    behind phony figures because we the people are happy for them to do so.
    Any measure by the state to control property prices would have been met
    with a howl of complaints (not least of all from the growing segment of the
    population owning multiple properties). We cheer as the property noose
    tightens while wondering why we are finding it harder to breath. Let us at
    least admit our own mistakees and remember them the next time we go to
    the polls.

    Aesop

  6. Denis

    Regarding the Demographia report mentioned in Pete’s post
    above, the main thrust of points made in the report are
    centered around excessive land regulation being the real
    reason property markets around the world have exploded.

    The report shows evidence suggesting low interest rates
    are only a minor factor, but time after time land
    regulation is cited, quite convincingly in this reader’s
    opinion.

    Have you considered this argument David? Is Irish land
    regulation (and perhaps pathetically poor infrastructure
    acting as virtual land regulation) to blame for the
    widening gap between incomes and property prices in
    Ireland 2006?

  7. Mairead

    David has hit the nail on the head – the government of
    Ireland is sacrificing the future and best interests of the
    under-30s for the sake of the rest of the population. This
    is an unsustainable policy but the Irish government is not
    alone. Governments throughout Europe are doing exactly the
    same to their younger generations. They are maintaining high
    standards for those already in the property and jobs markets
    but exploiting those who are not yet property-owners and
    doing very little to create job opportunities for young
    people starting out in work. Why? Because the over-50s are
    the generation who are most likely to VOTE. This policy is
    all about votes and nothing else. Young people should lobby
    their TDs and representatives and make their dissatisfaction
    known. The problem is that most young people move around a
    lot and, not being parents or property-owners, they often
    are footloose and not tied to a constituency. Being unable
    to afford to become either parents or property-owners thanks
    to government policies exacerbates the problem. Essentially,
    we are looking at the political disenfrachisement of a whole
    generation – at a time when Europe needs its youth more than
    ever. Thanks, David, for writing on an issue no-one else in
    the media wishes to address.

  8. kate

    Just one question from an ignorant turnip with a mortgage
    the size of a mountain – is it within our right as
    citizens of the EU to make a formal complaint to the Euro
    Commission ( those of us who identify unquestionably with
    these assertions)? If so, then I am sure I would not be
    alone in responding.
    kate

  9. adrian

    ‘To infinity and beyond’ Buzz Lightyear.

    I was young and in London during the late 80s. House prices
    were rocketing out of reach. Syndicates of young people
    were clubbing together to get on the property ladder before
    it was too late – they expected that if they didnt buy
    immediately then they would never be able to get on the
    ladder as prices escalated to infinity and beyond.
    The following year I remember watching afternoon T.V. as a
    full T.V. audience complained to Kilroy Silk about having
    lost everything, trapped in negative equity and unable to
    sell and move house.
    The government has overseen a vicious plunder of the future
    of Irish youth. Young people cannot afford to settle and
    have children.
    When the proverbial does hit the fan the politicians shall
    blame everyone except themselves.
    U.K. house prices shook fell by 2% in the last quarter –
    the tremors are close…..

  10. Pete

    Recently David described the housing market as a Ponzi
    scheme, which it certainly is. But in a normal Ponzi
    scheme, those at the top take the money and run, leaving
    the “fresh meat” at the bottom to lose everything in the
    inevitable collapse. The Irish have invented a “recursive
    Ponzi scheme”, whereby those at the top reinvest their
    profits at the bottom (ie. they use the increased value of
    their houses to buy more houses, or help their children
    buy houses). Have any studies ever been done on the
    outcome of such a scheme?

  11. Paul Rux, Ph.D.

    David, the gangster class that runs this country, the USA,
    has created a similar credit bubble around real estate.
    Bubbles burst sooner or later. I suspect sooner than most
    people think, if they think about it at all.

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