Inflation on track to rise above 3%

Inflation could be on track to rise above 3 per cent over the next few months, having jumped from 2.3 to 2.7 per cent in July, writes Una McCaffrey.

The annual rise, which brings inflation to its highest rate in almost a year, came as summer sales pushed prices down by 0.3 per cent between June and July.

Technical base factors were blamed for most of the annual increase, with a cut in mortgage rates in June, 2003, singled out as the main culprit.

Sharp increases in the cost of accommodation and beer were also notable contributors to the annual jump. Accommodation prices alone were some 10 per cent higher than in July, 2003.

The biggest monthly price change came in clothing and footwear, where sales drove prices down by 10.8 per cent. Furniture prices fell back by 1.8 per cent for the same reason.

A breakdown of the figures released by the Central Statistics Office (CSO) yesterday shows that the annual rate for goods was 1.3 per cent, while for services it was almost three times higher at 4 per cent.

Economists at Goodbody Stockbrokers attributed the disparity in part to employers feeding through their higher costs to customers. This phenomenon is particularly obvious in the transport sector, Goodbody believes.

Most economists agreed yesterday that inflation, while still low by historical standards, is now on a softly-rising trajectory.

This is likely in part due to once-off factors, such as electricity price increases to be implemented in October.

Climbing energy prices represent the wild card for inflation however, with uncertainty over oil making forecasts more difficult than usual. "We reckon higher energy costs will contribute just under one percentage point to an annual inflation rate that will likely run at just over 3 per cent," said Mr Austin Hughes, chief economist at IIB Bank.

He acknowledged that while higher energy costs will pose "upside risks" over coming months, businesses will probably still find it difficult to increase their selling prices. He also said that energy represents just 6.4 per cent of the basket of goods used by the Central Statistics Office (CSO) to measure inflation. In this way, the consumer price index could fail to fully reflect the impact of higher oil prices on consumers' pockets, he suggested.

A detailed analysis also released by the CSO show that higher energy prices added about half a percentage point to the annual inflation rate last month, even though energy prices actually fell between June and July.

Green Party finance spokesman, Mr Dan Boyle, called for the introduction of policies to limit the Republic's reliance on oil to meet "economic goals."

Fine Gael accused the Government of being "the single biggest culprit behind rip-off Ireland" through the implementation of "stealth charges". Labour party spokeswoman on consumer affairs, Ms Kathleen Lynch also expressed concern about "officially-sanctioned" price increases in areas such as electricity and health insurance.