Consumer boom has driven Irish inflation

The CSO has just published revised national accounts for the the Irish economy. The initial 4.6% decline in real GDP in the first quarter of this year has been revised down to -2.8% , thanks in large part to a smaller fall in exports than initially thought, but the most interesting aspect of the new data relates to consumer spending . It now transpires that we have been experiencing a consumer boom which also helps to explain why Irish inflation has remained stubbornly high.

Consumer spending in 2022 is now put at €133bn, which is €10bn higher than previously published, with 2021 also revised up,this time by €6bn. In volume terms personal consumption grew by 8.4% instead of the initial 6.6%, with 2021 now put at 8.4% from the original 4.6%. In other words real consumer spending over the past two years rose by 18.6%. As a consequence modified domestic demand ( which includes government spending and investment adjusted for multinational investment flows) is now seen to have risen by 17.5% instead of the initial 14.5%.

Consumer spending had fallen in 2020 because households could still buy goods but not a a range of discretionary services and it is spending on the latter which grew very rapidly last year.Spending on food and alcohol fell in volume terms but spending on restaurants and hotels rose by 27%, with a similar rise in spending on recreation and culture while spending on foreign travel rose by a massive 248%.

The most recent inflation data, for June, highlights the impact that spending has had on the price level in Ireland. The annual inflation rate is certainly slowing, down to 6.1% from a peak of 9.2% last October, but that largely reflects falling energy prices. Indeed the core inflation rate , which excludes energy and fresh food, is actually rising, hitting 7.1% in June.

Goods price inflation in Ireland is now just 1% while services inflation is 10.3% so it is the latter now driving the overall inflation rate. This does reflect higher mortgage rates ( adding 1.3 percentage points to the total) but the rebound in spending on the discretionary services noted above is clearly apparent in the CPI data: inflation in package holidays is 43%, airfares are up 34%, hotels are up 13% with restaurants at 6.6%.

The growth in consumer spending is slowing, to an annual 5.1% in the first quarter, and that would appear to be necessary if inflation is to fall back to the levels forecasters expect.