Difficult decision for Govt on how best to tackle rising cost of living
The Government faces a difficult decision on how to tackle the rising cost of living for poorer families while balancing environmental considerations, according to Professor of Economics at University of Limerick, Stephen Kinsella.
High inflation is being driven by rising energy costs, and should the Government choose to subsidise fuel, it will have a negative impact on the environment.
Prof Kinsella said it’s a real trade off. On the one hand poorer households who try to reduce their energy bills by restricting the use of their home heating, risk getting sick and going to hospital, causing expense for the taxpayer.
“The other issue is you are giving subsidies to fossil fuel producing entities so fundamentally it’s going to be bad for the environment.”
“The reality is that anything that helps, particularly lower income households, deal with the cost of energy, that’s probably going to be better,” he said.
Concern over rising inflation has seeped into Irish policymakers discourse, with talks of supports that people haven’t seen since the early 1980s.
Prof Kinsella said it is a concern that policymakers with the European Central Bank have never worked in an environment of high inflation.
They are meeting today to discuss monetary policy. Up to now, the ECB has remained insistent that inflation is transitory and they expect it to ease in the fourth quarter. They are not expected to signal a rise in interest rates, unlike the US Federal Reserve which said it would raise rates in March.
Prof Kinsella said there are two signals that we are likely to get: “Firstly asset purchasing will probably end, the ECB is intervening in the bond market to buy things and keep prices artificially high or low. Then the worry is that interest rates will rise thereafter.”
He said the real worry is currency volatility. “If central banks aren’t in lock step then investors holding different currencies will dump them when interest rates are signaled to rise. That will cause a lot of currency volatility which is going to wipe out profits for a lot of exporters. Exporters have huge inventory back loads because of Covid so it could be a big risk for these businesses.”