Any secondary school economics pupil can confirm that there are two main causes of inflation, one is increases in business costs and the other is excessive demand from consumers. But the latest inflation figures, issued yesterday by the Central Statistics Office, suggest that the latter cause may not be operating at present, at least not in this State. According to the CSO, inflation fell by half of one per cent in the three months from November to January bringing it to its lowest level for four years. And yet the exceptional economic growth (over 6 per cent last year, the Central Bank says) owes much to increased demand for goods and services, demand which is fuelled by low interest rates and easy availability of credit.
On the face of it, "demand-pull" inflation has ceased to operate. The Central Bank's fears of inflation therefore may be exaggerated and perhaps it should allow the interest rate reduction for the exporters and farmers are screaming. Or perhaps it shouldn't; not for the moment at any rate. One month's economic statistics should never be relied upon and there is much to suggest that the January inflation figures paint a picture which is somewhat removed from the real situation. It could even be argued that inflation figures as a whole are misleading. People trying to buy housing, especially in the Dublin area, would scoff at the suggestion of falling inflation and rightly so. House prices have shot up but they are not considtaken into account in the process of calculating inflation.
The January figures were heavily influenced by the traditional post-Christmas sales where sizeable (but temporary) price mark-downs proliferated. Clothing and footwear prices dropped by an average of 8.3 per cent, household goods came down by 2.1 per cent. It is estimated that price reductions in the New Year sales brought inflation down by 0.4 per cent. The February inflation figure will be less influenced by the sales and at the same time the inflationary effect of the Government's incautious giveaway Budget will start to work through. The February figures should be more reliable the Central Bank is right to urge caution.
But while not too much store should be set by the latest inflation figures they are encouraging. The inflation rate for the 12 months to the end of January is not available but it is probably below 1.8 per cent. This is one of the lower rates in Europe and the Central Bank is confident that it will rise to no more than 2.3 per cent during 1997. This is comforting indeed because one of the major criteria for membership of the single currency is low inflation. It will be this time next year before the exact qualifying rate will be determined but it is expected to be 3 per cent or a bit lower. It is of paramount importance that the criteria are met and it is essential therefore that every precaution is taken to keep the lid on prices even if it postpones an interest rate reduction much needed by some sectors. The pressure for a reduction has been brought about by the instability of the pound. There will be no instability for the pound if it can qualify for the single currency.