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Northern Ireland hit harder by high rate of inflation

Marguerite Shannon


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Average households in Northern Ireland spend relatively more than any other UK region on both food and non-alcoholic beverages

Average households in Northern Ireland spend relatively more than any other UK region on both food and non-alcoholic beverages

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Average households in Northern Ireland spend relatively more than any other UK region on both food and non-alcoholic beverages

Prior to its most recent surge, the rate of inflation measured by the Consumer Price Index (CPI), had been steadily increasing since the beginning of 2021.

Global supply bottlenecks as consumers shifted towards the consumption of goods (eg clothing, electronics) during periods of lockdown, as opposed to services like meals out, generated a surge in demand at a time when lockdowns and outbreaks of Covid-19 across the globe left the supply of goods constrained — pushing up prices.

Despite the ‘re-opening’ of many countries returning production and thus supply to more ‘normal’ levels, price pressures have not deflated. China, one of the most important players in global supply chains, have continued to move in and out of lockdowns as they pursue a zero Covid strategy.

And the war in Ukraine has now constrained global grain supplies, particularly influencing food prices, and restricted the supply of oil from Russia, impacting energy costs.

Constraints in global supply chains over the last 24 months have tested globalisation, a concept so ingrained in the production of goods and delivery of services that consumers no longer think twice about how their smartphone contains component parts manufactured in countries across the world, before arriving on their doorstep.

The exposure of a more fragile global market as borders closed, factories shut and self-isolation reduced the volume of workers has forced businesses to develop layers of protection e.g. increasing their inventories where possible, diversify towards more reliable suppliers — and not always at a lower cost — and look towards vertical integration by taking direct ownership of each stage of production, rather than outsourcing.

The latest figures reported inflation in the UK at 9.1%. That is the highest rate of annual inflation since 1982 and the highest across G7 countries.

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The particularly agonising part of current inflation is how inescapable it is. Recent price hikes have been driven by higher food prices (8.7% CPI), fuel costs (69.6% CPI) and transport (14.0% CPI). Unless you live within walking distance of your job and have a plentiful supply of your own crops, higher prices are currently unavoidable and will undoubtedly have an impact on living standards. If inflation was driven by higher prices for electronics or jewellery, consumers would have greater choice to either pass on or delay such purchases as they are less likely to be a necessity. However, people cannot pass on eating or, for the most part, travelling to work.

The extent to which inflation impacts different groups of people depends on how much of their income is spent on goods that have experienced the greatest price increases i.e. food, fuel and transport.

According to the Living Costs and Food Survey the average household in Northern Ireland (NI) spends relatively more than any other UK region on both food and non-alcoholic beverages (13% in NI, compared to 11% in the UK) as well as electricity, gas and other fuels — 6% in NI, compared to 4% in the UK. NI also spends the third highest proportion of expenditure on transport. Therefore, consumers in NI will be experiencing a more adverse impact of higher inflation, relative to consumers in other parts of the UK.

Further, across the UK those living in low-income households spend proportionately more of their income on food and non-alcoholic drinks, relative to those in high income households, specifically 14% of expenditure among those with the lowest income compared to 8% among those with the highest income. Therefore, low-income groups — of which NI has proportionately more than the UK average — are also more adversely impacted by higher inflation.

It is evident the nature of unavoidable price hikes has squeezed levels of disposable income among consumers. Retail sales volumes have continued to trend down since May 2021, the savings ratio (i.e. the proportion of disposable income which households save) has, more or less, returned to its pre-pandemic rate. Consumer confidence in NI dropped to its lowest level since the beginning of the pandemic and trade unions are now increasingly calling for pay boosts for employees. As our purchasing power declines consumers driven sectors such as hospitality and retail will particularly feel the blow.

The Government have expressed a desire to support those most impacted through the one off ‘cost of living payment’. However, with recent high levels of borrowing to fund Covid-19 recovery Government purse strings are tight. The Bank of England’s Monetary Policy Committee will seek to curtail rising inflation by increasing interest rates.

Higher rates of saving inversely mean lower rates of spending. A fall in the demand for goods in an economy raises red flags, particularly for countries reliant upon consumer spending rather than exports or investment as a driver of economic growth. In NI, almost two-thirds of total economic output is accounted for by consumer expenditure, high by international standards.

If the Bank of England successfully curtail inflation through reducing demand, then it is likely economic output will fall, provided the other drivers of economic output don’t change.

However, the position of the labour market may act as a cushion to avoid such a blow. The unemployment rate is very low, and business have been reporting recruitment difficulties and high levels of unfilled vacancies.

This current tightness of the labour market leaves the local economy in a better place to weather the storm ahead, relative to high bouts of inflation in the past.

Marguerite Shannon is a senior economist at the Ulster University economic policy centre


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