Years of inflation above EU average have taken their toll

Analysis: How did it come to this? At a basic level it is quite simple. The Republic is now top of the euro zone price league because inflation here has been well above that in other European countries for the past six years.

Prices of many products and services were well below our EU partners in 1995, but because inflation here has been clipping along at 2.5 percentage points per annum above the EU average, the actual level of prices here first caught up with and has now overtaken our euro partners.

The figures do not make for good reading. A basket of supermarket goods,priced at €218 here could be bought for €200 or less in all other euro states, except France.

But the gap is much larger in other areas. Ireland is an expensive place to be sick in. How is it that a box of 12 antibiotics cost €20.50 here, but only €11.10 in France and €6.60 in Spain? Or that a box of 20 Band-Aid here at €2.90 is exceeded only by Belgium? Meanwhile, a range of measures on the costs charged by pubs and restaurants suggests, not to put too fine a point on it, that we are being "ripped off". Only the Dutch, meanwhile, pay more for their hamburgers.

What has caused the rapid increase in prices here?

Much of the rise - particularly over the past two to three years - has been due to the increasing cost of services, such as hospital services, education, water, refuse and insurance. Between 2000 and 2002, services inflation accounted for just under three-quarters of all price increases here.

Part of the reason for rapid inflation in service prices - and prices in general - is the natural adjustment to the increase in wealth and productivity here in recent years. However, an analysis of this in the Forfás commentary on the prices report suggests that this explains only half the difference between services inflation here and in the euro areas since the mid-1990s.

Of greater importance has been the "overheating" of the economy, as demand was driven up by inward investment, lower interest rates and surging Government spending. This created a demand in excess of the supply available to meet it, with the inevitable result that prices rose.

In some sectors this was made worse by a lack of competition. The Forfás analysis instances the large contribution from alcohol price rises resulting in part from inadequate competition in the licensed trade.

The final villain - and here the Opposition parties should find ample feeding material - is the Government. In the year to January 2002, the price of services provided directly by the State rose by 15 per cent, compared to national inflation of 4.8 per cent. The price of Government regulated services rose by 7.2 per cent over the same period.

The report adds: "More broadly, the price of all goods and services that are subject to significant levels of Government influence accounted for 59 per cent of national inflation in the year to January 2003."

This overstates the "Government-effect" somewhat as it includes all of the price increase in excisable products such as cigarettes and some of this was due to supplier price rises.

However, PricewaterhouseCoopers, which completed the analysis for Forfás, estimates that the Government contribution could fairly be put as causing 30 per cent to 40 per cent of inflation last year, or up to 1.9 per cent of the 4.8 per cent rise.

The implications of high prices and high inflation are a hit to competitiveness on a number of fronts. Companies operating here find their costs rising more quickly than their competitors - a situation made worse for those selling outside the euro zone by the recent rise of the euro. This threatens to accelerate job losses. The high cost of living - and of housing - also makes is difficult to attract high-quality researchers and scientists here, a key goal of industrial policy. And the implications for tourism are obvious.

Forás and the Government -appointed National Competitiveness Council are calling for a clear target of getting inflation down to the EU average and a plan of action to achieve this.

Central to this is a commitment by Government to make this a top priority and to refrain from hiking up charges and taxes to meet the Budgetary gap. This would mean forgoing other spending - or borrowing more - rather than increasing excises again in the Budget.

It would also mean a huge improvement in the efficiency of providing Government services so that the cycle of higher spending and higher charges can be halted. Given the commitment to benchmarking pay increases to public servants this will be enormously difficult.

The report also calls for adherence to the pay terms of the new national agreement, more vigorous competition policy and a new commitment to examine the impact of all policy proposals on costs and inflation.

None of these are surprising recommendations and echo those made by a number of other recent commentaries. And still - beyond a commitment by the Taoiseach recently to reduce inflation to 2 per cent - we await a thought-out strategy from the Government, or from the much-vaunted national inflation initiative set up under the national programme. Yesterday the Government said it would not set a formal target, that no budgetary commitments could be made so early in the year and that competition initiatives were being examined. It is surely time, as the Elvis Presley song said, for a "little less conversation, a little more action, please".