Broader view of inflation is still worrying

We must compare our present state with others for a more objective view, writes Marc Coleman

First question: if instead of losing 5-2, Ireland had won its last match against Cyprus as expected, would the draw against the Czech Republic have been so well received? On much the same basis, if it hadn't reached a rate of 4.5 per cent in August, would the fact that September's inflation rate was 4 per cent still be something positive? Whether in soccer or economics, mediocrity is contagious, infecting future expectations by linking them to the present.

For a more objective view, we must compare our present state with the present state of others and we must compare our present with our past.

In its latest quarterly bulletin, the Central Bank does just that. Starting with inflation, it compares the so-called Harmonised Index of Consumer Prices (HICP) - a measure which excludes the impact of interest rate rises on mortgage repayment costs - for Ireland and the euro zone.

This makes sense because, for many in the euro zone, fixed interest rate mortgages are the norm. The HICP is only available for the euro zone up until August because some euro-zone countries have not yet reported their September rates and this prevents an accurate aggregate from being calculated.

Comparing our present state with the present state of others, the Central Bank's analysis shows how, on a like for like basis, our relative inflation position has worsened. From being zero at the start of the year, the gap between Irish and euro-zone HICP inflation rose to about 1 per cent in August.

Although Irish HICP inflation fell by one percentage point in September in Ireland, a similar development is likely for the euro zone, so however our HICP rate is slowing, the gap in September is likely to have remained significant.

Presenting the figures, Central Bank assistant director Tom O'Connell yesterday said: "There's still a big gap emerging there. While it's not as bad as some months ago, we still need to be concerned, particularly as we're starting from a situation where we have the highest price level in the euro area." As far as September's fall was concerned, he said it was "mainly reflecting a fall back in energy prices". In layman's terms; forget the Czech result, keep worrying about the Cyprus rout. There is plenty to worry about.

Ireland's export performance also came in for attention at yesterday's presentation: "There's a bit of pressure on the export side. Exports are not growing by as much as domestic demand."

And, on the balance of payments deficit - a measure related to the extent by which domestic demand driven import growth is outstripping foreign demand for our exports, he said: "We're getting to a stage where an orange light is showing." Productivity performance over the past few years had not been too good either, he noted.

A good assessment also looks at diverging contributions from different areas of the pitch. The latest bulletin examines a breakdown of Ireland's inflation performance between goods and services. According to the CSO, goods inflation in September was just 0.1 per cent while services inflation was 4.5 per cent. According to the bulletin, this dire performance is set to continue until next year at least.

The Central Bank has made no secret of their desire for more competition in the economy and yesterday was no exception. Neither did yesterday's CSO figures do anything to disprove their argument. Food prices continued to increase, but there was a marked difference between the prices of food items affected by the abolition of the Groceries Order, which continued to rise in price, and the prices of items not affected by its abolition, which stayed flat.

The Central Bank has deflated unjustified exuberance and reminded us that present performance can only be judged against historical standards. It hasn't done so without a degree of comfort in relation to one area in particular. On the government's spending plans, Tom O'Connell cautioned: "At a time when the economy is at full employment levels, it's not the time for the Government to be injecting demand." But he added: "Its not a hairshirt situation if one continues to grow spending by 8 or 9 per cent."

As I listened to the man speak, I started looking for linkages between economic developments and non-economic developments.

And then I remembered that Ireland's greatest and most prolonged period of soccer glory was in the late 1980s, when the economy's performance was dire. So sophisticated is the relationship that the time of the only recent downward blip in the economy - 2002 - was also the year in which we did well in the World Cup. Here's hoping Ireland's soccer performance doesn't improve too much.