Competition will beat services inflation

AnalysisAt just under 2.5 per cent, Irish inflation is tame compared to the double digit inflation of the 1970s and 1980s. But inflation is two-sided; we have what might be called Jekyll and Hyde inflation.

On one hand, consumers are benefiting from price falls across a wide range of goods. Clothing and footwear prices, for instance, fell by 9.7 per cent in July compared to June. This is not just caused by summer sales; prices fell annually by 2.6 per cent.

An increasing number of low-priced goods are produced in places like China and consequently, goods inflation is very low, a mere 0.8 per cent in July.

Overall inflation is higher for two reasons. Firstly, over half of the 2.4 per cent annual inflation rate reflects energy cost increases, reflecting in turn steady oil prices rises. These have continued into August, reaching record highs this week, promising further inflationary pressure in coming months.

The services sector is a second source of inflation. Food and alcohol prices are falling, but only as directly purchased. Prices for the hotel and restaurant sector are rising and account for a third of July's rate. Significant rises also occurred in Government-dominated areas like healthcare, education and transport.

While our inflation rate is roughly the same as in the EU as a whole, we must distinguish between the rate of price increase and price levels.

Irish prices may be increasing in line with those of the EU, but Eurostat data shows that their levels are 15 per cent higher.

This data was criticised for giving too much influence to highly priced Dublin. But although there may be an urban bias, it evens out in cross-country comparisons and Irish consumers still pay much more for their daily necessities than consumers in other EU states.

Recent falls in exports show that our relative competitiveness is in decline. Ireland needs inflation to be significantly lower than the EU average for years. How can we do this? Proposals have been made to reduce fuel taxes, but wholesalers and retailers may respond by increasing prices.

But action can be taken against service sector inflation. Sheltered parts of this sector must be opened to more competition and better regulation. Like the story of Jekyll and Hyde, this is one where good or evil must win out, with Government policy playing a decisive role.