Inflation hit to households to average €2,000 this year – KBC
Consumer sentiment plummeted in March, according to KBC Bank Ireland, in what was the biggest month-on-month drop in confidence since the onset of the pandemic.
There was a full ten-point drop in the index bringing it from 77 in February to 67 this month.
While not as pronounced as the 34.7 point drop in April of 2020, it was the 11th highest monthly drop in sentiment among consumers in the 26-year history of the index.
The unfolding war in Ukraine and the related economic and financial fall-out facing Ireland were the main contributors to the collapse in sentiment.
“The March survey saw a sharp worsening of the general economic outlook and a similarly large weakening in consumers thinking on the prospects for their own household finances that likely reflects notably increased inflation fears,” said Austin Hughes, KBC Bank Ireland chief economist.
A report from the Economic and Social Research Institute yesterday pointed to inflation possibly peaking at around 8.5% in the summer before settling down to average at 6.7% for the year.
The institute also downgraded the outlook for economic growth this year.
The KBC report said the prospect of a marked squeeze on spending power from higher inflation represented a ‘sea-change’ in circumstances for the average household, coming as it does on the back of years of very limted inflation for most of the past decade.
“Quantifying such pressures is made very difficult by the exceptional volatility in commodity prices at present as this makes the precise rate of inflation likely to prevail through 2022 unusually uncertain,” Mr Hughes said.
Using the current KBC Bank estimate of an average annual inflation rate of 6% in 2022, Mr Hughes calculated that the step-up in inflation between 2021 and 2022 would drain around €4 billion from consumer spending power this year, implying a hit to the average household of just over €2,000.
While some will be compensated by faster income growth, many households will likely face a palpable drop in living standards this year, the report noted.
The survey also captured a sharp downgrade in the outlook for the Irish economy, with only one in eight participants expecting an improvement in economic conditions in the next 12 months.
That was about half the proportion that expected that outcome in February, while the number expecting the economy to weaken increased from one in two consumers to two in three.
“Although this represents a substantial change in thinking it remains markedly less negative than the near universal expectation of economic weakness that was seen in the sentiment survey when Covid-19 first struck,” Mr Hughes noted.
Irish consumers are not alone in taking a dim view of the outlook against the backdrop of rising inflation and war in Europe.
The US reported a more severe downward trajectory in consumer sentiment than that in Ireland and confidence metrics in the UK and euro area are also expected to show substantial weakening in March.