The ‘cost of Living crisis’ is often cited as a key factor in explaining the poor performance of incumbent governments in recent elections, most notably in the US Presidential poll. Yet the major Central Banks are now loosening monetary policy with more easing expected (the ECB deposit rate is currently priced to fall to 2% from a high of 4%) which highlights the difference between inflation rates and the price level. It seems clear that it is the latter which matters to electorates, and hence politically, while the former guides central banks and money market expectations. It is also no doubt somewhat galling for governments to shoulder the electoral blame for rising prices, the control of which they handed over to independent central banks, who face no sanction.
In Ireland’s case the annual change in the CPI for October was just 0.7% (and only 0.1% on the HICP measure), down from a peak of over 9% two years earlier, and prices are actually lower than a year ago in four of the twelve index divisions.Yet consumer prices as measured by the CPI are 21% higher than four years ago. That is an average change and while some prices have risen by a similar amount (food is up 22% and alcoholic drink 24%) other components have seen much larger increases,.
Housing and Utilities are 49% higher, driven by an 82% rise in mortgages , a 70% rise in utility prices and a 33% increase in rents. Transport costs are 25% higher, with fuel prices up 29%, but airfares have actually more than doubled in the four years (+106%) .
Surveys consistently show that consumers overestimate the current inflation rate so the general public probably perceive that the increase in the price level has been even higher than shown by the above figures. Wages have risen too of course, and are currently outstripping inflation, but over the four years average earnings have actually lagged prices, rising by 18% against the 21% CPI increase.
The spike in consumer prices has been a global phenomenon of course and most governments can point to very low unemployment rates by historical standards but it seems electorates now take the latter for granted but punish governments for the rise in their domestic price level, particularly as it was last seen forty years ago and so outside the experience of many voters..