The inflation rate fell to 3.7 per cent last month, a welcome decline which brings it to its lowest level since late 1999. The combination of falling energy costs and the impact of the rising euro on import prices appears to have set inflation on a downward trend, with most forecasters now expecting the rate to drop below 3 per cent by the end of the year. The outlook for modest economic growth, meanwhile, should ensure that excess demand does not put pressure on the general price level as we move into the new year.
Causes for concern remain, however. While the inflation rate here is falling, it remains almost twice the EU average. Competitiveness here will thus continue to suffer, particularly if the euro makes further gains against sterling and the US dollar. Meanwhile, price pressures remain in areas of the economy, including parts of the services sector.
Government policy now faces two challenges. One is not to do anything to reverse the downward inflation trend in the coming months. The wage terms for the final year and a half of the new national agreement will come up for negotiation as we move into next year and it is vital that the downward inflationary trend is maintained, to allow modest and competitive terms which will at the same time offer real gains to employees. The second challenge for policymakers is to tackle the lack of competitiveness remaining in some parts of the economy; this would make a key contribution to building an efficient and low-inflation economy in the long term.
The decline in the Irish inflation rate also, unfortunately, reflects worrying international trends. Growth is low in all the main economies and inflationary pressures have eased to such an extent that deflation - or a period of generally falling prices - is now a threat. The European Central Bank yesterday forecast that the euro zone economy would grow by less than 1 per cent for the second year in a row. Meanwhile, the outlook for the US economy is also uncertain, due in no small part to its rising current account balance of payments deficit.
These trends suggest that the next few months will offer little in the way of good news for the Irish economy. Growth is likely to remain subdued and a further sustained rise in the value of the euro would threaten the jobs market, which so far has performed remarkably solidly. This uncertain international backdrop makes it all the more important that the Government does what it can to stabilise inflation at a relatively low level in the coming months and presses ahead with an agenda of building competitiveness and ensuring value for money and efficiency in the provision of public services.