Measuring inflation is more of an issue now than its resurgence after this crisis
THURSDAY INSIGHT
INFLATION hawks are enjoying something of a revival after spending the last decade or so licking their wounds, and they are linking the ‘war on coronavirus’ to price spirals that they say accompanied the economic shocks that occurred after past military conflicts.
On the basis that the hawks cannot be wrong forever, perhaps their time indeed has come, although evidence from China shows that while it is relatively easy to reopen factories, it is more difficult to convince people to go out and spend.
But before we even get to the threat of inflation, we need to worry about whether the con- sumer price index is still relevant, given that the coronavirus is reshaping the way we live and what we buy.
Who, for example, needs to fill their car with petrol when you can travel only short distances and your workplace is closed? It raises the question of whether fuel remains important in factoring inflation.
By the same token, lockdowns have shuttered the high street, which means that the Central Statistics Office (CSO) simply cannot get the data it would usually obtain from shops that now are closed.
The last reading for Ireland in April’s first estimate from the European statistics agency Eurostat showed we were experiencing negative inflation – as the headline rate fell by 0.2pc from a year ago. The CSO will issue its own release today.
But those declines were driven in large part by falling fuel prices - largely irrelevant to the cost increases experienced by consumers whose cars mostly sit in driveways during the lockdown. By the same token, restaurant and cinema prices have become irrelevant.
But the so-called ‘weights’ allocated to goods and services to calculate inflation have remained the same.
“Price changes for the goods and services in the CPI and HICP are aggregated using weights that reflect household consumption patterns in the previous year,” the CSO told the Irish Independent.
The CSO collects approximately 53,000 prices each month. The reason it measures prices rather than spending is because it is far more costly to do so for actual spending. It simply hopes that actual expenditure weights do not change very much from month to month. So food, which is now a far greater share of our weekly budget, still has a weight of almost 9pc in the CPI basket of goods and services.
Quite how dramatic that change has been is illustrated by data from the Central Bank of Ireland which shows that spending on food and perishables rose by 43pc, a whopping €373m, in March and that e-commerce spending, where prices are harder to track, rose by 11pc.
The purchase of other goods and services has fallen off a cliff. For some, like cinemas and restaurants, activity has ceased. So there are no services being bought and yet they remain in the basket, being counted with the same weights as before the pandemic.
Recreational and cultural services, which includes those closed cinemas, still account for almost 4pc of the price basket while the now-deserted rail and bus networks of Ireland are part of a transport services index that is worth nearly 2.6pc of the index used to calculate inflation.
“Our approach to this will be imputation of price change for items in the basket where consumption has ceased or where it is not possible to collect reliable price information,” the CSO said.
This is standard practice across all of the EU’s national statistics agencies.
It just doesn’t reflect our lockdown reality and will not reflect real spending patterns for many months to come as the Government here follows its phased plans to open the economy from May 18.
Central Bank of Ireland data shows transport and accommodation fell by 56pc and 55pc respectively in March, while restaurants and entertainment dropped by 31pc and 17pc.
When the April numbers come out and reflect the impact of a full month of lockdown, those declines will be even larger.
While the pandemic has dealt an unprecedented shock to both demand and supply, most economists believe it will lead to prolonged caution from consumers, who will save more and spend less, alongside seeing years of job and wage market gains wiped out.
Even those economists who do worry about inflation peg their concerns to some undefined time in the future, not as an imminent concern.
But to know whether inflation is a threat, we may have to look once more at the components that go into calculating it.
In 2017, the CSO revised the list of components that went into the price basket. In came champagne, which had been removed from the weightings during the austerity period of 2012, reflecting a more affluent post-crisis Ireland.
It remains to be seen whether post-pandemic Ireland will still be popping those corks as the economy recovers.
There is likely to be prolonged caution from consumers