Rising inflation rate a threat to agreement on national wage pact

 

The continuing rise in inflation is not good news for employers, employees or the economy generally.

It may be true that much of the rise is made up of higher oil prices, or increases in the cost of cigarettes, but when negotiating wages, or deciding whether to sign up to the new agreement, most people will concentrate on the headline number. And inflation of 4.3 per cent does not make wage increases of 5 per cent look particularly generous.

The Department of Finance insists this is a temporary glitch. After last month's figures, when inflation rose to 4 per cent, the Minister for Finance said consumer price rises would fall back to 3 per cent within months. That may be true but much depends on several factors beyond the control of anyone in this State.

Among the most important is oil prices. Over the past year crude oil prices have risen more than threefold and, at around $30 a barrel, are at their highest since the Gulf War.

Prices have been rising since OPEC agreed quota cutbacks last March. According to Mr Jim Power, Bank of Ireland's chief economist, the crucial date in terms of the future direction of oil costs is OPEC's next meeting in Vienna on March 27th.

Hopes are rising that the meeting will produce a compromise. OPEC's biggest member, Saudi Arabia, has long signalled its willingness to increase production but the Iranians have held out. Good news came last week following a meeting between the Iranian and Saudi oil ministers. The Iranian minister Mr Rijan Zaganel agreed it would ensure a "timely and adequate supply".

Nevertheless analysts say the ideal of $18-$20 a barrel for crude oil is probably not achievable. Last year's cutbacks have diminished inventories to such an extent that many experts are predicting queues at American petrol stations over the coming months. It may even be next year before real price falls flow through to the market. According to Mr Power, an agreement allowing for the production of around an extra 1.7 million barrels a day will be necessary to ease the situation, although other analysts say that even 1.5 million may just do the job. The agreement last March took almost 4.3 million barrels a day out of production.

One problem with even getting this agreement is that Iran has little incentive; with almost no spare capacity it has nothing to gain from increased production. The Iranians are also worried that a similar pattern to 1997 could emerge when quota increases caused prices to drop to around $10 a barrel.

Mr Power says an agreement is likely to mean Irish inflation dropping back to below 4 per cent whereas a continuation of current high prices will mean inflation continuing at current levels above 4 per cent.

There is also little that the Irish authorities can do about another factor contributing to inflation - the weak pound. The euro is still under pressure against the dollar and sterling. Unless UK manufacturing starts showing a serious impact from the strength of sterling or the euro picks up significantly, this is unlikely to change. Clothing and footwear and newspapers and books which are already imported from the UK are likely to come under increasing price pressures despite intense competition.

There is also little chance that services inflation will fall back. This is one of the clearest indications of the tightness of the labour market. And only increasing wages which eventually lead to falling demand for labour is likely to sort that out.

Cigarettes are, of course, a different matter. Mr McCreevy put 50p on a packet of 20 in the Budget at the behest of the then minister for health, Mr Cowen. That has added considerable pressure to the Consumer Price Index. One way to mitigate this would have been to introduce a cut in duty on wine which is, in any case, in line with EU practice. That would certainly have ensured that headline inflation did not rise above the psychologically important 4 per cent.