Inflation on the rise again with more pressure expected

 

Inflation rose again last month having fallen slightly in June and July. The 0.6 per cent rise in August in the Consumer Price Index meant that year-on-year inflation rose to 4.5 per cent.

The figure confirmed that the Republic has the highest rate of inflation in the EU and a number of commentators said yesterday they expect high inflation to continue into 2003.

The main drivers of the year-on-year increase were health (10.1 per cent); miscellaneous goods and services (9.8 per cent); education (9.7 per cent); and restaurants, hotels and licensed premises (7.5 per cent).

The EU Harmonised Index of Consumer Prices figures for July, also released yesterday by the Central Statistics Office (CSO), shows that the Republic had the highest year-on-year inflation rate in the EU, at 4.2 per cent.

The next highest rate was in the Netherlands at 3.8 per cent, followed by Greece and Portugal, both at 3.6 per cent. The lowest rate was recorded in Germany, where inflation was 1 per cent. The average was 1.8 per cent.

Economic commentators said the figures for the Republic show that inflation is not being driven by the introduction of the euro but rather by entrenched inflation in the non-traded services sector.

Mr Ciaran Fitzgerald, director of sectors in IBEC, said the "twin drivers of Irish inflation" were domestic wages and a lack of competition in the protected-services sector.

"The populist myth that the changeover to the euro has allowed prices to get out of hand is yet again undermined by the official CSO figures," he said.

He added that, rather than getting side tracked into "spurious euro pricing issues", people should concentrate on "the real drivers of Irish inflation, such as insurance, energy and labour costs".

Mr Austin Hughes, chief economist with IIB Bank, said it was "striking that services-sector inflation has shown so little sign of improvement in the face of a marked weakening in Irish economic growth."

He said the figures for August reflected a lesser fall in energy costs than last year and a sharp rise in clothing costs after the summer sales.

"We expect further upward pressure on inflation in the months ahead," he said.

"We expect upward pressure from a range of high-profile price increases such as VHI charges, university admission fees and travel charges.

"Looming increases in ESB and gas prices may not hit the index until the beginning of 2003 but, together with a risk of budget hikes in indirect taxes and further increases in public-sector charges, they could sustain a disappointing inflation trend through the early part of next year."

Mr Alan McQuaid of Bloxham Stockbrokers said that, despite having improved somewhat in recent months, the inflation rate appeared to be back on an upward trend, with little indication that it was going to fall below 4 per cent in the immediate future.

"Given the prospect of significant hikes in domestic electricity charges, gas prices, VHI, and bus and rail fares in the coming months, not to mention the possibility of a large rise in oil prices if the US launches a military attack on Iraq, then there is more likelihood of the country's inflation rate hitting 5 per cent before it drops before 4 per cent again," Mr McQuaid said.

A number of commentators expressed concern that high inflation would lead to wage-increase demands and affect the new partnership deal talks.

Mr Mark Fielding, chief executive of the Irish Small and Medium Enterprises Association, commented: "We are currently simply pricing ourselves out of the market, particularly as inflation is currently running at 2.5 times the EU average."

Mr Fielding said the Government had contributed significantly to inflationary pressures, particularly through increased costs in education, health and energy.

Opposition spokesmen also criticised the government. Mr Richard Bruton, Fine Gael spokesman on finance, said many of the cost pressures were coming directly from price increases introduced by the government in education, health and local authority rents.

Mr Brendan Howlin, the Labour Party's spokesman on finance, said the latest figures were further evidence of the mismanagement of the economy by the government. Inflation was likely to lead to pressure by workers for wage increases.

"Workers and consumers cannot be expected to bear these increases without compensation," he said.