Cappuccino prices cause for concern

In the last couple of months the outgoings of the leafy suburban northside household have managed to scamper ahead of the incomings. This is mainly due to the recent new kitchen expenditure (a spot of stainless steel, a dash of beech, high-gloss tiles - you get the drift) which has forced a rethink on the entire home decor scenario.

It was an accident waiting to happen - once you slap on a bit of paint somewhere, every other surface looks dull in comparison and you're suddenly in a never-ending circle of painting and polishing and dropping a couple of hundred quid every weekend in the DIY store.

I was exchanging painting tips with a friend of mine (tip one, get someone else to do it) and she told me that she was thinking of getting an extension done to the house. It was too expensive to move, she said, but they could afford to indulge in a little of what Jane Austen called "improvements". They wanted to do something now, she told me, because who knows what condition the economy will be in next year and they can borrow now before interest rates shoot up.

More and more people are getting edgy about the prospect for interest rates, particularly since the most recent Fed hike. Immediate reaction after the event was relief that increases were over for now in the US but it didn't take long for the rate-hike theorists to decide that twice was not enough and that the Fed would be forced into at least one more hike before the end of the year. In its post-meeting statement the Fed said that the hike would "markedly diminish the risk of rising inflation going forward", but "markedly diminish" isn't good enough for the people who pore over inflation data. It means that every single economic statistic that comes out of the US will now be scrutinised for its inflationary possibilities and its likely impact on Fed thinking.

A decade ago, economies with inflation rates of 4 per cent would have been seen as paradise islands where everything in the garden was rosier than you could believe. Inflation in the US is running at 2.4 per cent at the moment, and market players are concerned. Not because 2.4 per cent is worrying, but because it might go higher. Oil prices continue to move up and the jobless rate remains at recent lows of 4.3 per cent. That means potential pressure on wages as there are less and less people available at cheap rates.

And we all know where that leads - mad consumers spending like there's no tomorrow on things like new kitchens and the almost obligatory stainless steel kitchen utensils at ridiculous prices. The problem with higher rates in the US, though, is that people are expecting Europe to follow. And that's despite the comments by the new Bundesbank president, Mr Ernst Welteke, as he took over from Mr Hans Tietmeyer recently. Mr Welteke stated, quite firmly, that rate hikes in Europe would be "pointless" as there were no current inflationary pressures.

Of course, right now, there aren't - inflation in both France and Germany is close to 0.5 per cent and they're certainly not in the same league as the US when it comes to potential wage inflation either. The unemployment rate in Germany is currently 10.5 per cent while in France it is almost 11.25 per cent. And most forecasts for euro-zone inflation expect it to stay below the European Central Bank's target rate of 2 per cent for the foreseeable future. If the ECB wants to push rates higher it's more likely that the reasons are for some sense of "credibility" rather than real inflationary concerns.

In the Republic many people have been surprised at the benign numbers coming out of our own Consumer Price Index. Since the CPI measures a basket of goods and services, one can only assume that the prices of those goods and services haven't gone up very much over the past 12 months. With our latest annual inflation number at 1.2 per cent, we seem to be sitting pretty.

It depends, of course, on what you want to buy. Lots of goods that were incredibly expensive a few years ago just aren't that pricey anymore. Mainly, I suppose, anything that has a shred of technology in it. I remember the last hi-fi system but one having a crunching impact on my cash flow at the time of purchase. The most recent one hardly caused a blip. That's because my mortgage rate is down since last time and the much more technology-brilliant new hi-fi actually cost less than the one bought over five years before.

But what about things that have gone up in price? Is it just a case that they're not included in the CPI at all?

Under the heading of "foodstuffs" does it include tomato and fennel bread, extra virgin olive oil or fresh egg pasta? These are all items that are now part of the Irish consumers' shopping basket. (In fact I'm not sure if you can buy ordinary sliced pans in some Dublin 4 grocery emporia any more.)

And what about cappuccinos, almost obligatory after a meal these days? Made in most places in Dublin it's overpriced froth. One of my colleagues had recent experience in the takeaway cappuccino market. He ordered one to go, but when he got the (average) sized waxed cup it was half empty. Asking for it to be filled, he was told that what he wanted was obviously a "double cappuccino". The cost - a mere £2.70.

For a half a cup of coffee (and don't forget that coffee prices are falling like autumn leaves) and half a cup of suds. It's that kind of episode which makes me worry about inflation despite myself. Never mind, though, if it all goes horribly wrong and rates do go up again, the shelves of the supermarkets will no doubt be groaning once more under the weight of the original sliced pan and coffee granules.

However, I don't plan to worry about it, not this week anyway. By the time the column gets to print I plan to be lounging on a sunbed in Sicily, where inflation is at 1.7 per cent and cappuccino, tomato bread and olive oil come at everyday prices. Ciao.

Sheila O'Flanagan is a fixed- income specialist at NCB Stockbrokers