January 16, 2014
Why does it feel as if you have less money in your pocket at the end of every month?Posted in Articles · 262 comments ·
There is a great offer from Dublin Bus called the Rambler. It is a 30-day, all-bus ticket including the likes of Aircoach. For regular bus users it constitutes great value, rather than paying for separate journeys each time you hop on and off a bus. However, something strange is going on in prices these days.
Last week, I was talking to an old mate who is a bus devotee and he was making the point that the rate of inflation is not accurate. He says he is listening to all sorts of experts telling him that we are living in a low-inflation environment, yet he doesn’t feel it. As evidence, he pulled out his Rambler card. In 2011, the Rambler cost €105 per month. Today, it costs €137.50. This is an enormous jump in the fare.
At a time when the rate of inflation is supposed to be low, the price of bus travel, which is hardly a luxury item, has jumped dramatically. The monthly Dublin Bus Rambler ticket is now €32.50 more expensive than it was in 2011. To put that in context, this is a 30pc increase in three years. Thirty percent in three years! This is Latin American 1980s-style price inflation.
But it is actually much worse because in Latin America in the 1980s (as was the case in Ireland in the 1970s) wages were going up in tandem with prices. Here, something much more egregious is going on. Wages are not keeping up with inflation and therefore, every month, ordinary people are getting poorer, not richer.
Do you feel that at the end of each week the amount of money left in your pocket is declining?
If the answer is yes, it is because, across the board, the price of basic items we all spend money on every day is rising much faster than our wages.
Alerted by my mate’s dilemma with his Rambler card, I decided to have a look at what has happened to everyday prices over the past three years, since the troika has been in town. Then I contrasted it with what is happening to wages.
Have a look at the chart. Since 2010, wages in this country have risen by 3pc in total. This is less than 1pc per year and as taxes have gone through the roof, the impact on disposable income is unambiguously negative.
Within the wage figure, the enormous disparity between the average weekly wage in the private and the public sector remains. The chart doesn’t capture it because it just looks at what has happened to wages in both sectors since 2010 — they have hardly budged. However, the public sector started with much higher wages. Even today, according to the CSO, people in the public sector on average are paid over €284.99 more per week than their neighbours in the private sector. This is totally unsustainable but is the topic for a later column.
Today, I don’t want to discuss what divides public and private sector workers. I want to focus on what binds us.
So in contrast to what is happening to wages, the costs of gas and electricity have risen three times faster than wages. Rents, particularly in Dublin, are now sky-rocketing and are rising eight times faster than wages, according to daft.ie. Health costs are also outstripping wages. Indeed, health costs are rising twice as quickly as wages. And the cost of education is now out of control. The cost of education is rising 12 times faster than people’s average wages.
Much of this rise in heating, power, education and health is hidden in the state budget or quasi-state budget so where the average person mightn’t be paying for their children’s education directly, you are paying for it in higher taxes, which go to pay the rising cost of the education service. The same argument goes for health costs. These are picked up in higher taxes or added to the health insurance premiums.
From the chart, we can see that the cost of transport has fallen a bit. This development is largely a drop in petrol prices. However, it’s not passing through to public transport and my friend’s experience with the Rambler card shows that public transport costs, in certain cases, are going through the roof. In general, over the past three years, transport costs have risen four times faster than wages.
Now do you see why people feel they have less money at the end of the week?
Why is this?
It is because the adjustment in Ireland has been overwhelmingly shouldered by the average person and, if you are lucky enough to have kept your job, your wages will have suffered. Remember the wages in the chart do not take into account what has happened to income and other taxes. The impact of wage freezes and tax hikes on take-home pay has been enormous.
Interestingly, and it’s not in the chart, the cost of clothing and shoes has collapsed. This is because retail sales have plummeted, so prices have had to fall. In addition, the retail market is highly competitive, so a fall in demand leads to falls in prices. So traders on the main streets on Ireland have seen their margins crushed.
Unfortunately, as landlords have only belatedly acknowledged, commercial rents are far too high, therefore many retailers have simply closed.
In the months and years ahead, it is not practical to think that wages can remain subdued when other costs are going up at such a rate. After all, the whole point of a successful economy is to have as high wages as possible for as many people, that’s what it’s all about.
If the Government doesn’t want to bring utility and state-sector costs under control, it can expect industrial relations fireworks ahead. The choice is the Government’s to make.
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