Finance | The origin of increased cost of living and inflation and measures to curb them
To ask the Minister for Finance if it is proposed to take any specific measures to challenge cost of living increased with particular reference to their origins; and if he will make a statement on the matter;
To ask the Minister for Finance if he will indicate from an economic perspective, the most effective means of curbing inflation from whatever source and any other inflationary tendencies evident here that can be remedied; and if he will make a statement on the matter.
Inflation picked up sharply over the course of the last year with the HICP index standing at 8.3 per cent in May, a multi-decade high. Almost every advanced country in the world is in the same position, with euro area HICP inflation reaching a record 8.1 per cent in May.
The key driver behind the elevated level of inflation at present is the sharp rise in wholesale energy, food and other commodity prices since the onset of the war in Ukraine. Pass-through price effects are already being felt in other sectors, such as food (via fertilisers and fuel costs) and consumer goods (via higher energy inputs). Indeed, the rise in non-energy or ‘core’ inflation suggests that inflationary pressures are becoming increasingly broad-based.
The Government is acutely aware of the cost pressures currently facing households and businesses and has responded to help alleviate some of this burden. On a cumulative basis, the Government has announced €2.4 billion in cost of living measures since last October. These measures include changes in tax and social welfare, the provision of an energy credit for households and a temporary reduction in the rate of VAT on the supply of certain energy products.
Whilst the Government will continue to work to minimise the fall-out on those who are least-equipped to respond, resources are limited and we cannot cushion all households and businesses from the entire impact of the current shock. Furthermore, in calibrating how we respond to the current challenges, it is important that we strike the right balance and ensure that policy doesn’t inadvertently add further inflationary pressures into the system.
Finally, it is worth pointing out that monetary policy is the first line of defence against inflation. In this context, the European Central Bank has indicated a tightening of policy in the coming months. By slowing demand in the economy, this should help bring demand and supply back into balance, with positive implications for inflation.
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