Eoin McGee: Inflation is everywhere we look, but we can control some things
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Right now it doesn’t matter which way you turn, you walk into “inflation”. Whether it is the cost of gas and electricity going up by 25-45%, a politician telling us what they are going to do for us, or the opposition saying what the other politicians should be doing for us, inflation is constantly in your face right now.
The latest blow is a 0.75% rate increase from the European Central Bank, on top of the 0.5% early in the summer. The European Central Bank has a single mandate when it comes to increasing or decreasing interest rates — it is mandated to use interest rates to control inflation.
When prices started to rise, it suggested that prices going up was as a result of us “transitioning” from a Covid world into a post-covid world. This rhetoric got it out of jail for a while and it did not increase rates but now inflation is here, it hurts, and the central bank must fulfil its mandate to increase interest rates.
The issue is that this is no ordinary inflation. Ordinarily, the world economy comes out of some event such as a recession and activity increases gradually over time.
When it starts to overheat a little, the central bank uses interest rates to curb the growth. But we went from practically zero demand worldwide during Covid to the world being fully open. In addition, some people were sitting on cash they accumulated during lockdown and we saw demand jumping to uncontrollable levels very quickly.
However, it is not just issues with supply and consumer demand driving up prices. These issues are coupled with the awful humanitarian situation in Ukraine and a global energy powerhouse trying to hurt Europe by controlling the gas supply.
An increase in energy costs affects everything. When the cost of gas, electricity, and oil goes up it does not just trickle into all other areas of the supply chain, it practically floods through.
Take the cost of a pint, for example. The costs of barley, yeast, and commercial water have increased by 93%, 387%, and 51% respectively in the last 12 months.
The truck that delivers the keg has been hit with fuel price increases. As for the pub itself, the cost of light and heat has gone up along with stronger wage demands from staff who are also feeling the pinch. This impacts on what we pay for the pint, and the cycle continues. This time, though, is different.
Because it is different, we all need to take a different approach. People ask me all the time what they can do to combat inflation. The simplest answer is that you must control your controllables.
If you are with the same provider for more than a year, go and get your most recent gas and/or electricity bill and log on to CRU.ie.
It has a list of all gas and electricity “switcher companies”. These companies will handle moving you from one provider to another. It is not unusual to hear people saving anything from €400 to €1,400 when they switch, and it can be done very quickly online.
This is just one example of you taking back control, and you need to take back control because other things are outside your control. For example, 50% of mortgage holders could now be looking at a payment increase.
In Ireland about 50% of mortgages are fixed. Unless you are about to come to the end of your fixed term, this ECB rise will not affect you. But the other 50% of mortgages are on either a tracker or variable.
If you are on a tracker, in common with about 25% of people, you will be hit with the full 0.75% increase. For every €100,000 on your mortgage, assuming there is 20 years left to go on the mortgage, this means an increase of about €35 per month.
Lastly, we have variable-rate customers. Unlike tracker rates these don’t have to go up when the ECB goes up, but it is very much expected that the banks will pass on the cost this time around.
In general, lenders in Ireland charge more for mortgages than lenders do across Europe. They no doubt would argue my point, but this means when rates go up they have a little wiggle room. But don’t hold your breath if you think at least some of this increase isn’t going to be passed on to variable-rate customers. If it is passed on in full you are looking at the same rises as tracker customers, but they may not pass it all on. Time will tell.
We need to try and take control of what we can. We need to be conscious about what we spend and more than anything particularly if times are hard for you right now, we need to talk to each other about money. No different than any other problem we face talking about your money problems does help.