Rate falls for first time in 18 months

The rate of annual inflation has fallen for the first time since July 1999 and the trend looks set to continue over the rest of the year. The fall has been welcomed by all the social partners. But while it is good news in itself, there are other problems facing the Irish economy.

If the euro and oil prices stabilise around current levels it looks as if inflation could fall to between 3 per cent and 4 per cent by the end of the year. Interest rate reductions from the European Central Bank will help that process.

This is positive news for workers and consumers, who have seen the value of their earnings eroded over the past year as inflation soared to a 16-year high. It is also good for our reputation abroad. As inflation rose, so did the negative commentary from the UK and London in particular. Rising inflation was the final nail they needed to hammer home the message that the Irish economy was set for a crash landing. Yesterday's figures do not fit in with that argument.

However, Fine Gael's Mr Michael Noonan is also correct when he points out that most of the fall is attributable to so-called base effects. Merely by leaving the price of cigarettes static in the December Budget, Mr McCreevy ensured that around 0.7 of a percentage point would be wiped off December's consumer price index. A petrol price rise in November 1999 not replicated in December last year had a similar effect. But domestic inflation is still strong, particularly in the services sector.

Nevertheless, the latest figures mean that the pressure should come off wage negotiations. Last year's renegotiated Programme for Prosperity and Fairness was the result of inflation substantially above what had been assumed in the initial agreement. Now the assumption is that inflation will average 5.5 per cent this year and unless OPEC reneges on agreements or the euro again goes into freefall, the outlook will be more benign - probably by a good margin.

SO barring pressure emanating perhaps from the ASTI dispute, this year ought to be more peaceful on the industrial relations front. It is possible that there will not be serious slippage from the new terms of the PPF - at least in the public sector.

Private-sector wages are far more dependent on the wider economic picture. A very tight labour market has led to rapidly rising wages, particularly in new technology sectors. In general terms, high wages can mean being priced out of the market. This process will probably continue - if not, then accelerating domestic costs at a time of a world slowdown will mean a serious loss of competitiveness for the economy.

But inflation is not just about the consumer price index. As Mr Jim O'Leary, chief economist at Davy Stockbrokers, pointed out the CPI is nether a necessary nor sufficient indicator of overheating.

He says that overheating means wage and house price inflation as well as congestion. "These impact the quality of people's lives to perhaps a greater extent than the CPI but because congestion is unmeasurable it is often discounted."

The future of the US economy is also paramount although there is little we can do to sway this. But if the US economy does go into a serious or prolonged recession there will certainly be problems for Ireland.