Feared wage price spiral has probably already begun

The most recent inflation figures show that the dreaded wage price spiral has probably already begun.

The most recent inflation figures show that the dreaded wage price spiral has probably already begun.

The only issue, according to Mr Austin Hughes, chief economist at Irish Intercontinental Bank, is the intensity, extent and duration of that spiral. The Government's moves to date to control prices are not likely to have much impact.

Inflation is currently running at 5.5 per cent. That is likely to rise to 6 per cent next month when mortgage rate rises come fully into effect.

But EU-wide inflation is also on the rise and with the figure at 2.4 per cent, the European Central Bank is probably left with little choice but raise interest rates by another half percentage point in September.

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That will add even more pressure to the figures here, given the reliance of many people on variable rates for mortgages.

According to Mr Jim Power, chief economist at Bank of Ireland, the ECB is likely to increase rates again towards the end of the year.

Interest rate rises, high oil prices and a weak euro will very much limit the impact of the moves to cap drink prices and price rises from other public bodies including the VHI which according to Mr Hughes are more cosmetic than substantive.

He says that if all the bodies being approached by the Government, including doctors, banks and solicitors, refrain from putting up prices in the next six months, a quarter of a percentage point may be knocked off the index.

Therefore, the peak in inflation later this year may be 6.25 per cent rather than 6.5 per cent.

The concern is that these bodies will use the temporary price freeze as an excuse to quickly put up fees after the period and hence the inflation figures will not see the improvement next year that would otherwise have been expected.

Much more radical measures are needed if the Government wants to bring down the headline rate.

It could go much further and actually reduce public sector charges rather than freezing them. After all a cut in bus and train fares would have more populist appeal than a freeze in solicitors bills and would also have a greater impact on the inflation index.

Mr Hughes estimates that the Revenue's coffers are being swollen by some £300 million to £400 million this year as inflation increases the tax take.

That could go some way to allowing public transport prices to fall.

Mr Hughes favours a cut in excise duty on petrol prices, although this is opposed by the Economic and Social Research Institute (ESRI) which points out that it would boost demand and hence not be environmentally friendly and could be in breach of our commitments under the Kyoto protocol.

But according to Mr Hughes oil prices are currently up 14 per cent and so even if that were halved there would still be a trend of increases.

Other measures which would help are a pre-announcement of any excise duty cuts or cuts in indirect taxation such as VAT.

These could mean that consumers would postpone spending until after the cut and could also encourage retailers to pre-announce price cuts.

There are, of course, arguments against simply meddling with the mechanism.

As Mr Danny McCoy of the ESRI points out there is little logic in simply fiddling with the measurement of inflation rather than dealing with the price increases themselves. Nevertheless the Government may buy itself a little time by doing so.

If it does not there is a risk that an inflationary psychology becomes ingrained and workers expect that pay rises every year ought to be in double-digit figures.