Inflation once again. What can Gov do about it?

Sam Russell · 03-04-2022 11:56am #1

Inflation is rearing its nasty head again after a decade of very low inflation, and it is reported to be overtaking housing as the number one concern in the polls.

So what can be done about it?

Inflation in this case is mainly coming from the huge rise in energy prices - caused by deliberate reductions in production of oil and gas, followed by the Ukraine war. This is imported inflation and there is little, long term, that can be done as it is totally out of the control of our Gov. The most that can be done is minor mitigation as any sharing the burden by reducing taxation can only go so far as the revenue has to be replaced or borrowed, and again that can only go so far as shifting the revenue will also be inflationary.

Now, inflation of the 10% and above will cause recession, which will not combat the inflation - only make it worse. Recession will cause unemployment, which will increase spending on social welfare, and those on welfare will no longer be paying employment taxes.

What follows then is prices chasing inflation, and, worse, prices anticipating inflation.

Customer - 'Why is the price going up?' Seller - 'It is because of inflation!'

No, inflation is the price going up - it is not a cause. Inward prices could be a cause, but does the margin need to be maintained? The way to tackle it is to keep people in employment, narrow margins, and seek lower cost alternative supplies - like local producers, or lower cost alternatives, or just do without.

I do not have the answers (obviously), but we do need answers. Previous economic problems have been solved by emigration, but we now have significant immigration so that safety valve is not there anymore.

L1011 · 03-04-2022 12:03pm

Suspend alcohol MUP, as it is something entirely domestic which is driving inflation:

https://www.independent.ie/irish-news/alcohol-price-hikes-are-helping-to-pump-up-the-rate-of-inflation-41515261.html

Won't have a major impact, but as so many contract prices are set to rise by CPI or CPI+, every other input in to raising the CPI causes prices rises elsewhere.

Sam Russell · 03-04-2022 12:20pm

https://www.boards.ie/discussion/comment/118873705#Comment_118873705

Well, yes, but MUP is only stopping loss leader pricing. Last year, before Christmas, I purchased Jameson whiskey at €15 a 70cl bottle, and Guinness 535 ml can at 75c per can. Now MUP brings those up to approx. €25 a bottle, and €1.65 per can . Normal prices per unit would be close to these prices if special offers were not included. 0% alcohol Guinness is still €1.50 a can and is not governed by MUP.

Selling vegetables at silly low prices has caused many Irish producers to close businesses and will result in higher costs and lower quality as those products are imported from Spain and other countries at much higher prices and longer supply lines. It is time for the supermarkets to be controlled by some regulator as they control about 90% of the market between 5 suppliers, and all are very profitable. That is the basis for uncompetitive market conditions to flourish.

The CPI statistic is only designed to pump up inflation 'because of inflation'. For example, tolls on our motorways are governed by this, but funding for motorways (PPP) is basically capital funding and is related to interest rates which are currently at historic lows, not CPI, and should not be automatically raised in sympathy with the CPI. This is the best example of inflation chasing inflation.

We need to think this out a bit more.

L1011 · 03-04-2022 12:36pm

MUP is far higher than stopping loss leaders, and that alone could have been done much easier. Martin removed the ban on loss leaders when minister.

Brussels Sprout · 03-04-2022 1:04pm

It's a tough one OP. The sources of inflation are external (energy and supply chain issues) and also the typical tool that central banks use to control inflation is also external (Interest rates - controlled by the ECB). The government can try and reduce prices by reducing certain taxes but there is no guarantee that those will actually get passed on the customers. Even if they are, there is also a danger that by leaving more money in the economy, in this manner, that this can possibly cause even more inflation.

As an explainer of that last point: To take an extreme example - imagine if the government got rid of all taxes overnight. Any goods or services that are in any way scarce in the economy would immediately shoot up in the price (I'm thinking rents and house prices) as suddenly everyone competing for them has more disposable income to push up their prices.

Aside: I have noticed that whenever someone asks this question on a forum the answers are pretty much always "Get rid of that specific tax that I personally dislike".

Sam Russell · 03-04-2022 1:50pm

https://www.boards.ie/discussion/comment/118873849#Comment_118873849

What proportion of spending is alcohol?

Rent is the biggest problem, and that could be combated by freezing rents and banning evictions for those that pay the rent (and comply with social behaviour). It is ridiculous that landlords have huge constitutional rights but renters do not, and can be thrown out on the street for any reason the landlord dreams up.

External inflation rapidly gets imported into local inflation because inflation begets inflation.

greenfield21 · 03-04-2022 2:01pm

The main cause of the inflation is government spending with Ukraine added on top now.

03-04-2022 2:14pm

We've been irresponsible with money for far too long now and this is the result.

Blaming Russia is silly. Inflation was already high anyways.

Viscount Aggro · 03-04-2022 2:17pm

Public sector pay freeze is needed. The unions are first to the trough to negotiate pay increases.

This will cause a wage / price spiral.

History Queen · 03-04-2022 2:22pm

https://www.boards.ie/discussion/comment/118874270#Comment_118874270

I'm a teacher so obviously a vested interest here. Is the logic not that increased wages means more spending power which means more money circulating in the economy? I'll happily not take a wage increase if it'll help lower the cost of living.

Traditionally what are the best ways fora government to curb inflation?

Manach · 03-04-2022 2:52pm

As it is usually a government that is at fault for its inflationary economic polices, so then getting them to fix it is can be somewhat ironic. The last major inflationnary event occurred in the 1970s. We are, unfortunately to this conservative, a vastly different society in terms of expectations and being non-longer enjoying the same degree of social cohesion. From what I read of accounts of how states handled inflation (eg France in the late 1940s as per the book Paris by Cooper) very painful spending decisions have to be made that the state which might come as a shock to the populace at large. Otherwise the secondary effects of mass strikes and shortages will provide a negative feedback loop. For example, see Sri Lanka over the past few weeks.

Sam Russell · 03-04-2022 3:09pm

https://www.boards.ie/discussion/comment/118874299#Comment_118874299

Obviously not a student of economics. More money in circulation causes inflation - more money chasing fewer goods.

In the 1970s, Ireland had inflation in excess of 20%, and price controls did not work. Pay freezes did not work. Strikes did not work. Borrowing did not work - all of income tax was used to pay the interest on the Gov borrowings. It took until the 1990s before we got out of that situation.

Interest rates rise to reduce inflation, but we do not control that.

Growth is the only solution open to us - but genuine growth that increases the wealth of the nation, not the multi-national corporation growth antics that play with transfer cost numbers to reduce their tax bills.

History Queen · 03-04-2022 10:01pm

https://www.boards.ie/discussion/comment/118874433#Comment_118874433

Oh I'll happily admit that my knowledge of economics is extremely limited. Didn't Reagan have some success at curbing inflation with a combination of severly reducing public spending and reducing taxes, amongst other measures (I think there was some stimulus for private business/enterprise)?

Geuze · 04-04-2022 12:22am

https://www.boards.ie/discussion/comment/118874299#Comment_118874299

Typical way to reduce inflation is to raise interest rates, to cause an overheating economy to cool down.

The problem today is that the inflation is mostly cost-pus inflation, caused by problems on the supply-side, rather than demand-pull inflation, caused by a strong economy.

Geuze · 04-04-2022 12:23am

https://www.boards.ie/discussion/comment/118874270#Comment_118874270

Current PS pay deal:

2021 = 1% rise

2022 = 1% rise

In the PS, real wages are falling.

Sam Russell · 04-04-2022 10:14am

https://www.boards.ie/discussion/comment/118876240#Comment_118876240

Reagonomics (Reagan's idea of economics - he was suffering from dementia) was to give tax cuts to the very wealthy - republican billionaires - and this extra wealth would trickle down to the poor as a result in increased spending by the billionaires. It only benefited the billionaires as they are billionaires because they do not spend their money.

This current inflation is caused by energy price increases on the international markets that can only be countered on an international move to counter this. Giving domestic pay rises and other domestic mitigation will only import this inflation into the domestic economy that will be very hard to eradicate. It will take decades to eradicate if it takes hold.

I do not know the best response - our politicians have not been great in the past.

combat14 · 05-04-2022 6:54pm

https://www.boards.ie/discussion/comment/118874270#Comment_118874270

so ordinary workers are supposed to take a 8.5% pay cut in real terms - pull the other one

Viscount Aggro · 05-04-2022 8:07pm

They are not taking a paycut.

Its simply a lowering of living standards.

beggars_bush · 05-04-2022 9:14pm

make it worthwhile to go out and work.

reduce tax bands and USC. increase the actual take home pay.

so many people in construction, hospitality crying out for staff and they cannot get people to work.

babyducklings1 · 05-04-2022 9:55pm

https://www.boards.ie/discussion/comment/118885914#Comment_118885914

Exactly this and maybe more as well. If people don’t feel it’s worth their while going out to work they won’t plus loss of benefits like medical card for example.Why not instead give all workers a few go visits per year so they don’t have this fear of being stripped of their medical card.

Over heard someone recently talking about not wanting certain hours in employment as they’d lose their medical card.

murpho999 · 06-04-2022 12:18pm

https://www.boards.ie/discussion/comment/118874208#Comment_118874208

I really don't think you know what inflation is.

murpho999 · 06-04-2022 12:19pm

https://www.boards.ie/discussion/comment/118885914#Comment_118885914

Those measures will probably increase inflation.

There's not a lot the government can do except provide financial support and/or reduce VAT.

Widdensushi · 06-04-2022 12:44pm

Get rid of the carbon tax is the easiest and most effective measure, instead of that they are increasing it.

Brussels Sprout · 06-04-2022 2:35pm

https://www.boards.ie/discussion/comment/118888406#Comment_118888406

Do you have a reference for that claim?

Widdensushi · 06-04-2022 2:40pm

https://www.boards.ie/discussion/comment/118889113#Comment_118889113

For which? That increasing fuel prices are driving inflation? Do you disagree with that statement? Or that increasing carbon taxes on fuel are helping driving up the prices? Surely both are self explanatory.

Widdensushi · 06-04-2022 2:43pm

https://www.boards.ie/discussion/comment/118889113#Comment_118889113

https://selectra.ie/energy/guides/billing/carbon-tax

Brussels Sprout · 06-04-2022 2:48pm

https://www.boards.ie/discussion/comment/118889152#Comment_118889152

That it's the "easiest and most effective measure" to combat inflation.

Why not any of the other taxes that the government levies?

Starfire20 · 06-04-2022 3:17pm

https://www.boards.ie/discussion/comment/118885914#Comment_118885914

less of a case of can't get people to work and more of a case of can't get people to work for crap wages.

raising wages will no doubt entice people into these jobs but that would mean less profit for the bosses and we can't have that now can we

Widdensushi · 06-04-2022 10:50pm

https://www.boards.ie/discussion/comment/118889226#Comment_118889226

Have you a reference for the reason why the newest and currently increasing tax removal would not be the easiest, most effective measure? Your own opinion would be welcome rather than looking for others to post opinions that aren't their own.

CrookedJack · 06-04-2022 11:14pm

https://www.boards.ie/discussion/comment/118891768#Comment_118891768

Ha, that's brilliant "Can you prove that the thing I can't prove is true, is not true". Some man.

Widdensushi · 06-04-2022 11:23pm

https://www.boards.ie/discussion/comment/118891877#Comment_118891877

Can you give your opinion/alternative please.. rather than a pointless post, thanks.

Inflation once again. What can Gov do about it?

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