Government hard-pressed to arrest present trend of creeping price rises

Inflation - as the Government admitted yesterday - is going to continue rising over the coming months. Indeed, it could well go above 5.5 per cent, the key level that would leave workers believing that all their pay rises are being eroded.

The Government is thus keen to point to the added bonus of tax cuts and yesterday's statement made the point that standard pay increases under Partnership 2000 and the Programme for Prosperity and Fairness would generate increases of 9 per cent to 14 per cent. But that line has so far failed to seize the public's imagination and must be extremely unlikely to do so now.

However, simply waiting for inflation to fall back, as it inevitably must, is not an option for the Irish Congress of Trade Unions and, as one observer noted yesterday, it needs to be in "observable activity". Nevertheless, as the Government seems to be recognising, almost all courses of possible action are not only short term and cosmetic but many may actually make the situation worse over the medium term.

The main factors driving up inflation are the relative weakness of the euro, which may now be on the mend, the high level of oil prices which may not, and once-off factors such as the 50p increase in cigarette prices in the last budget, which will disappear out of the consumer price index in December.

There are a number of ways of trying to tackle the latter. The first suggestion was a compensating decrease in either excise duties or VAT to make up for the increase in cigarette prices. That would work to reduce the consumer price index but again for one year only. And the real problem is that after that period it could act to increase demand, making the initial problem worse.

The second idea is price controls, which the Government did not entirely rule out yesterday but did not in any way highlight. This has been tried before and could involve setting a maximum ceiling for the price of a pint. According to Mr Dermot O'Brien, chief economist at NCB Stockbrokers, the problem with this - besides the difficulty of enforcing it - is that past experience has shown that as soon as it is lifted the price jumps sharply back to where it would have been, putting serious additional pressures on consumer prices that time.

The Irish Business and Employers' Confederation also has serious reservations. According to director general Mr John Dunne, it would not only send the wrong signals abroad in terms of the adoption of an old-fashioned economic approach but would not be sustainable.

"There is no substitute for managing the economy properly and in the circumstances we now find ourselves, for more rapidly getting to grips with competition type issues, a quicker pace of deregulation and the breaking of monopolies. These are the sorts of issues that should be concentrated upon," he said.

One thing that may be done was alluded to by the Government yesterday in terms of "price monitoring and publicity". The director of consumer affairs is already taking a number of publicans to court for failure to publicise prices and the regulations in this regard may be more fully enforced in future.

But the only way to bring down inflation in such a rapidly growing economy which is so reliant on the outside world is to increase competition. The Tanaiste, Ms Harney, has repeatedly stressed this as has the Minister for Finance, Mr McCreevy. This could mean a large increase in the number of pub licences but so far the Government has shown no appetite for biting this particular bullet. The opportunity to do so is there with the Intoxicating Liquor Bill currently before the Dail. Other areas include taxi licences, although the impact of introducing more on inflation would be negligible.

Another likely area could be the repeal of the Groceries Order, which has already been recommended by a report on Ms Harney's desk and this is thought likely to form part of the package of measures. This would not be welcomed by IBEC among others.

"The ban on low-cost selling has proved its worth and should be retained," Mr Dunne said yesterday. "The items covered by the order have suffered far less under inflationary pressures than those excluded."

Those views are broadly echoed by NCB's chief economist, Mr O'Brien. He points out that the initial effect would be a price war among major supermarket chains. That would benefit the consumer and cut the consumer price index. But again the rub is over the medium term. Would supermarkets use their new-found additional muscle to drive prices higher than they were before.

Yesterday's Government statement also alluded to other areas which the ICTU would like to see targeted. These could involve legal and accountancy practices which would be welcomed by the broad brush of union membership.

The Government is also talking about action in areas such as childcare, profit sharing and transport. None would have much impact on the CPI but in terms of the "feel-good" factor for employees could work well. Actions on childcare could also help labour supply issues, while CIE has long argued for extra Government support.