Consider an 18-year old, born in 2008, the year the financial crisis kicked off. For the first 13 years of their life, there was no inflation. By 2021, overall prices, as measured by the Central Statistics Office, were just a couple of per cent higher than they were in spring 2008, when the first rumblings of banking trouble were starting to sound. In the five years since then, consumer prices have risen by not far short of one-quarter. The price of a white sliced pan remained roughly constant at €1.30 from 2016 to 2021, and has since risen to about €1.67.

The latest crisis, sparked by the war in the Gulf, suggests that the price surge which followed the Russian invasion of Ukraine – and was influenced by the post-Covid world economy – was a sign that the world had changed. Ireland may not see a similar spike in prices this time, though of course, we don’t know how the conflict will play out. The latest forecasts note Irish inflation rising to more than 4 per cent on the basis of the rise in energy costs seen so far – serious, but a long way from the inflation spike of 9 per cent we saw after the Russian invasion of Ukraine, driven in part by higher gas prices.

The long period of “no inflation” is now well and truly over after the financial crash. In an era when economic power is being weaponised, shortages and inflation result, whether from higher energy prices, trade wars or upended supply chains. The old world of globalisation and goods being made wherever was cheapest, with little regard for politics, is gone. Now, countries seek security of supply and don’t want to rely on key supply lines seen as unfriendly. The US, for example, is willing to accept that making its own computer chips and key drugs might cost a bit more in order to keep more control of the whole process itself.

With inflation now “back”, part of the problem for Ireland is that it is not starting from a good place in terms of costs to consumers – or businesses.

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Prices are already high by international standards. The latest EU-wide figures show that prices for consumers in Ireland are the second highest in the EU, 38 per cent above the average and second only to Denmark. Irish prices are more than a quarter higher than in France and Germany. Business costs are also high, notably in the area of energy, but also across the board.

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Slowly, but surely, Ireland has become a high-priced country over the past 20 years. In the Celtic Tiger period of the late 1990s and 2000s, Ireland steadily climbed the league. In 1995, it was the eighth most expensive of the then 12 countries in the EU. By 1999, Ireland had climbed to fourth, with prices then roughly in line with France and Germany. The middle of the next decade had the State up to third. By 2020, prices here were more than one-third above the EU average.

You could argue that high prices are appropriate for an economy where growth has outpaced anywhere else in Europe, leaving Ireland with one of the highest gross domestic product (GDP) levels. But as we know, GDP is a flawed indicator, inflated by multinational accounting. Those who live in “the GDP economy ” – multinational managers and their advisers – can afford the €4 americano and the additional cost of petrol at the pumps. They also have savings as a cushion. Many households now belong to this group after years of strong growth and rising incomes. But for many others on more average wages, high Irish prices are a problem. The squeeze was already there and is now getting a bit tighter.

In a commentary on the latest consumer survey from the Irish League of Credit Unions – showing a sharp drop in confidence – economist Austin Hughes estimates that, after adjusting for inflation and the rising population, the spending power of the average Irish household is a bit lower now than five years ago. Official figures also suggest that real incomes in many more average-income households have not been doing as well as those at the higher end. The level of arrears on energy bills also suggests a squeeze at lower income levels.

Consumer spending – a key part of the overall economy – has been resilient in recent years, helped through Covid and the 2022 inflationary spike by State supports. Together with the relatively strong headline condition of the public finances and high employment levels, this suggests the economy could get through a temporary inflation rise.

If inflation stays higher for longer, however, Hughes says the rise that it will expose some “underlying frailties” is a “real and present danger” – in other words, households and some businesses have suffered financial damage and have limited resources to weather another storm. They will now worry as they watch markets being upended, hear forecasts for higher mortgage rates and recognise the complete unpredictability of what happens next. And businesses will worry about costs, too and about competitiveness.

Whatever way events fall, cost-of-living pressures will remain the dominant theme in Irish politics. And the crunch is how to help the lower- and lower-middle-income working households. Poorer households can be assisted via welfare payments – and work is needed here on how best to do this in the longer term and how to pay for it. The better off in the “GDP economy” can manage.

But the political issue is how to support those in the middle ground – the families at work on average or below incomes who are genuinely hit as inflation increases again. This goes beyond short-term payments for temporary shocks – it involves how key services like education, health and childcare are delivered and paid for the sizeable group who always feel they are running to stand still. As the year goes on, the Coalition will be reminded again and again that the squeezed middle is a reality and not just a catchphrase.

© The Irish Times