Inflation falls but is likely to stay high

Irish inflation fell slightly last month but is expected to remain high for the remainder of the year. Prices rose by 0.5 per cent in May, bringing the annual rate to 4.7 per cent. This represented a small improvement on the annual rate in April, which was 4.8 per cent, according to the Central Statistics Office (CSO), but Irish inflation remains the highest in the euro zone and more than twice the average.

Inflation was highest in the miscellaneous goods and services category, which includes childcare, insurance, and legal and professional services. Prices in this sector rose by 10.8 per cent over the past 12 months. Inflation over the same period was 10.2 per cent in health services and 9.7 per cent in education.

Commentators focused yesterday on continuing high annual rates of inflation rather than the small fall in the annual rate in May. "As long as inflation continues to run at twice the EU average, this country will lose competitiveness and run the risk of losing jobs as well as the gains in living standards of recent years," warned Mr Brian Geoghegan, the director of economic affairs at IBEC.

"Excessive wage increases have pushed up the cost of services and labour-intensive goods. Nowhere is this more evident than in the State sector itself and this points to the need for a new focus by Government on a comprehensive action plan to curb inflation and give it top political priority," he said.

Figures also released yesterday by the CSO showed that average weekly earnings in the public sector - excluding the health service - rose by 9 per cent last year. The number of people working in the public sector (excluding the health service) grew by 10,000 to 230,000.

"Taking the increase in numbers into account, the wage bill for these services will have grown by 14 per cent in 2001, adding over €1 billion to public spending," senior IBEC economist Mr Aebhric McGibney said.

Mr Jim Power, economist with Friends First, said controlling inflation through wage restraint would be difficult. "Rising wages are fuelling higher prices. . . Nipping it in the bud will not be easy in an environment where the introduction of the euro is being exploited and margin-widening activities are rampant," he said

Inflation is likely to average 5 per cent for the year, according to Mr Austin Hughes, the chief economist with IIB Bank. Softening oil prices and the rising euro will exert downward pressure on inflation over the summer, but domestic pressures and rising interest rates will push it back up later in the year.

The main factors contributing to the rise in inflation last month were higher transport costs - due to rising fuel prices and car parts - and increased communications costs attributed to higher telephone rental charges.

Health charges also increased, reflecting the rise in fees charged by dentists and doctors, and increased costs of prescribed drugs. The price of alcohol, clothing, footwear, package holidays, meals out, hairdressing and entertainment also rose.