Price Inflation and Social Welfare Rates

Today’s inflation numbers show further falls in July for both the CPI and HICP. The falls sa are not as big as the raw nsa figs. The CPI is now (sa) 6.4% below the October 2008 peak. The HICP, which excludes mortgage interest and some other small items and which I prefer, is 2.6% off its November 2008 peak (sa).

There has been, understandably, considerable reaction to the Bord Snip proposals for cuts in Social Welfare rates. These were increased in last October’s budget by 3.1 to 3.3%, the increases effective from January. In the budget speech, the Minister predicted a positive inflation rate in 2009 of 2.5%. If he had instead predicted a zero rate, it is a fair guess that there would have been no change. It now looks as if the 2009 price level will work out perhaps 5% below what was assumed in the budget. 

If the proposal to cut rates by 5% were to be implemented from January next, the resultant rates in real terms, using the HICP rather than the CPI, would still be ahead of the October 2008 level, even if there are no further falls in the HICP. If the alternative 3% cut were implemented, the resultant rates would leave recipients better off in real terms than they were prior to the October 2008 increase. Of course, the big losers from the recession to date have been those laid off and newly reliant on Social Welfare (apart from ex-billionaires), and not the (far larger) group of long-term recipients.  

Richard Tol and David Madden have posted notes here drawing attention to the distributional impact of relative price changes which deserve a more extended response when time permits. For now, I would just like to make two comments:

(i) David notes that the lowest income deciles smoke cigarettes, and it has long intrigued me that the regressive impact of sharp recent increases in cigarette taxes attracted no negative comment from the political left. They should’nt smoke, you see.

(ii) Even the 5% reduction would still keep real HICP values at about pre-budget levels, if I understand Tol et al correctly. 

Finally, if all the €21 billion gross spend on social transfers were directed at the very lowest income groups, some of the more hysterical reactions would be reasonable (‘destruction of the welfare state’, no less). As a glance at the Household Budget Survey will confirm, significant entitlements reach well up the income distribution, reflecting the presence of substantial universal, as distinct from means-tested, expenditures.

Exchequer Cost of NAMA and the Social Dividend

There has been understandable focus on what NAMA will pay for distressed assets, and the risk of over-payment. This is the biggest component in considering the broader problem of re-constructing the banking system at minimum cost to the Exchequer, but it is not the only one.

Excess Exchequer cost could also be incurred if NAMA comes under pressure to dispose of assets on anything other than best commercial terms, and this pressure has already commenced. A ‘social dividend’ from NAMA has been suggested, notably by ICTU president Jack O’Connor. Mr. O’Connor called on RTE radio on Friday for the State’s newly-acquired property portfolio to be deployed in the provision of schools, sports facilities and health centres. There seems to be some support for this approach from Green Party spokespersons, and it is all too easy to see the notion growing legs.

Disposal of assets at less than best commercial value is a direct cost to the Exchequer, € for € as costly as excess payment for those assets on acquisition. There may well be a case for improved provision of schools, sports facilities, health centres, and indeed lots of other things, but it is an illusion to pretend that the State’s imminent acquisition of an enormous property portfolio at enormous cost somehow relaxes the overall Exchequer constraint.

NAMA will of course need to avoid over-payment. It will also need to avoid becoming an adjunct to the National Lottery Fund, dispensing property assets to worthy causes.

The June Inflation Figures

Price index numbers for June were published last Thursday. There are consistent seasonals in the Irish numbers, although CSO does not adjust, presumably because the seasonals are small, ranging only from 98.9 to 100.6 for the HICP. But the seasonals are big enough to affect month-to-month comparisons when inflation is around zero, and it is better to adjust. This note uses the 2008 seasonals computed on the data run up to Dec 08 by John Lawlor of DKM mentioned here in an earlier posting.

Seasonal effects are small through most of the year but bigger over year’s end. No statistically significant nit should be left unpicked.

Both HICP and CPI sa fell again in June. HICP has fallen for seven straight months, CPI for eight. The last twelve sa HICP and CPI numbers are, in mom % changes,

sa % Chg   HICP     CPI

Jul 08       +0.1     +0.1    

Aug 08     -0.2     +0.2   

Sep 08     +0.2     +0.2

Oct 08       0.0     +0.1

Nov 08       0.0     -0.8

Dec 08     -0.5      -1.1

Jan 09       0.0      -0.9

Feb 09     -0.6      -1.1

Mar 09     -0.4      -0.3

Apr 09     -0.1       -1.0 

May 09    -0.6       -0.7

Jun 09    -0.1        -0.3 

The HICP peaked in July 08, since which point it is down 2.2% sa. The CPI peaked in October last, and has fallen 6% sa from that point. The HICP is a subset of CPI – about 9.5% of CPI by weight is excluded from HICP, and 6.7% of this is mortgage interest. So the difference between the two is almost entirely mortgage interest.

I have argued elsewhere that mortgage interest (the price of credit, not of a good or service) does not belong in a general index of consumer prices, and I prefer HICP, which has recently been falling more slowly. It was the other way round a couple of years back, when interest rates were rising. There will be another switchback when the ECB gets round to raising rates again. (Don’t ask!).

The June Euro-area figs will be out in the next few days. I expect that they will show that Irish HICP inflation over the last twelve months has run about 2% below the Eurozone average. This is not much of a real-exchange-rate adjustment and it is fair to ask whether it has further to run.

The Govt increased Social Welfare rates of payment by a little over 3% in the October budget, with the increases effective from January 09. Jobseekers’ Allowance, for example, rose 3.3%.

In the October budget documentation, Finance stated that they expected HICP inflation, year 09 versus year 08, to be about +2.2%. At this stage, it looks as if the actual fig could be more like -2.2%, and the real value of the main payment rates (using HICP) is about 5% ahead of where it was last Summer.  

CSO have set up a committee to review price index numbers and it is to advise the DG of CSO before year’s end. I prefer HICP to CPI, and the UK, whose RPI has the same mortgage interest problem as our CPI, has begun to place more stress on the HICP. There are of course other options. If you have any views on the best way to measure consumer prices, this is a good time to let CSO know.

New Energy Policy Report

The Irish Academy of Engineering has released a report here which argues that enegy investment plans should be scaled back, and expresses scepticism about our high renewables targets.

Employment Gains and Losses by Sector

The National Accounts suggest that the activity peak was about Q2 2007, so the last reading on pre-recession employment was about Q1 2007. The QNHS published yesterday gives Q1 data for 2007, 2008 and 2009 on the new basis. Figs in 000 are from the sa Table 3.

Sector                    Q1 07      Q1 08     Q1 09     % Chg 09/07

Agriculture              108.9       116.9     102.7           -5.7

Industry                 305.3       288.1     268.6          -12.0

Construction           270.7      256.6      184.0           -32.0

‘Public Sector’         453.2      463.7      480.7            +6.1

All Other                963.1     1013.6      945.3            -1.8

Tot Employment     2101.2    2138.9     1981.3            -5.3  

Unemployed             98.5       109.9     223.4          +126.8

Labour Force         2199.7     2247.6    2203.0            +0.2

‘Public Sector’ is the sum of NACE categories O, P, Q, Public Administration, Education and Health, and includes over 100K not formally public servants. Some commercial Semi State employees are in Industry. The most dramatic collapse is in Construction, down 32%, with Industry down 12%. The OPQ ‘Public Sector’ has grown 6%,  and is the only sector exempted from the downturn thus far. The quarterly peak was actually in Q4 08 and there are now recruitment curbs and budget cuts, so this sector may turn negative through 2009. But to date, the OPQ sector has added 27,500 since the downturn started (+6.1%) while the rest of the economy has shed 147,400 (-8.9%).

The propagation of the employment contraction out of construction in 07 into the rest of the private economy in 08 is clear. The QNHS unemployment rate grew from 4.5% to just 4.9% through 07, but soared to 10.2% in the four quarters to Q1 09. Since the most sharply-contracting sector has a mainly male workforce, an interesting effect is that 45.1% of the employed workforce is now female, an all-time record. Labour force growth has ceased and the participation rate has been dropping steadily for a year. In total employment terms, the fastest decline was in the most recent quarter, and with probably not a single sector now expanding, the Q2 figures will hardly bring much joy.