Increase in price of services sends inflation upward

Sharp increases in the price of services forced inflation back on an upward trend in October.

Figures released yesterday by the Central Statistics Office (CSO) show that annual inflation stood at 4.6 per cent last month, the highest rate recorded since May. The annual rate had been steady at 4.5 per cent in August and September.

The most significant driver behind the move was education, which cost consumers 11.6 per cent more in October than in the same month a year ago.

Prices for miscellaneous goods and services and health both grew by 9.6 per cent.

Over the same period, the price of clothing and footwear declined by 5.4 per cent, and furniture prices grew by just 0.2 per cent.

Dr Dan McLaughlin, chief economist with Bank of Ireland, said the divergence between services and goods inflation was "not a uniquely Irish phenomenon", but acknowledged that it may be more pronounced in the Republic. "It's all driven by one thing only and that is higher wages," said Dr McLaughlin.

Consumer prices in the Republic continue to rise more than twice as fast as the euro-zone average inflation rate, which initial estimates put at 2.2 per cent for October.

Between September and October, average prices increased in the Republic by 0.5 per cent. Education was the biggest stimulus in the shift, with prices in the sector growing by 7.3 per cent.

Mr Austin Hughes, chief economist with IIB Bank, believes inflation could touch 5 per cent before the end of the year.

The Economic and Social Research Institute predicted earlier this week that inflation would average 4.7 per cent for 2002.

This depends to a large extent on actions taken by the Minister for Finance, Mr McCreevy, in the forthcoming Budget.

Dr McLaughlin said a harsh increase in tobacco taxes, for example, would drive inflation above consensus expectations.

Mr Alan McQuaid, chief economist with Bloxham Stockbrokers, said that, even without excise hikes in December, inflation was set to rise to 5 per cent, as price increases in transport and electricity were introduced.

Fine Gael's finance spokesman, Mr Richard Bruton, accused the Government of fuelling inflation through price increases in education, healthcare and ESB services.

Ms Joan Burton, Labour spokeswoman on finance, called for a more "proactive" policy towards combating price increases.

There was little prospect of the Government meeting its target of reducing inflation to 2.25 per cent by 2004, Ms Burton said.

The Small Firms Association said a target of 2 per cent should be set, warning that inflation could soon become embedded in the economy.

Mr David Croughan, chief economist with employers' group, IBEC, said inflation could be reduced only through wage moderation.