Inflation figures for last month, due to be published tomorrow, are likely to show yet another sharp rise in the annual rate. The May consumer price index figures showed a surprise jump to 5.2 per cent and forecasters expect a figure of around 5.5 per cent in June, rising to above 6 per cent in the autumn. Just a few months ago Government ministers criticised those who warned of the danger of an inflationary spiral; now they are being forced to take the situation seriously, although their response to date has been far from convincing.
The June figures will add to the unease in the trade union movement about the terms of the Programme for Prosperity and Fairness. The Irish Congress of Trade Unions is to discuss the issue later this week and it is sure to be central to the discussions at an implementation review of the PPF by all the social partners next week. The benefit of the pay rises agreed as part of the plan will now be completely wiped out by higher prices, the unions point out, and pressure for a renegotiation of the deal is rising.
A number of prominent economists are arguing, with some justification, that a pick-up in inflation will help to slow the economy from its current unsustainable growth rate. With interest rates now controlled from Frankfurt, they point out, there is no other mechanism to slow the economy. However the danger is that a sustained upward spiral in wages and prices could set in, undermining competitiveness in a more sustained way and damaging long-term growth prospects.
What should the Government do? In the longer term, measures to increase competition will do much to hold down prices. Proper competition in the alcoholic drink market, for example, would be more effective in holding down prices in the long term than the current temporary price controls on some products.
And new proposed health insurance legislation - now belatedly under consideration - could help to promote competition in that market, a more effective policy than stopping the VHI from imposing a 9 per cent rise this autumn, as the Minister, Mr Martin, has done. The VHI is now to submit a revised plan. The move by Mr Martin and his intention to ask doctors to freeze private fees are understandable, as every effort must be made by the Government to hold down the level of price increase. But they are only short-term measures. Considerably more will be needed to retain trade union support for the PPF, although there is no easy policy option.
Promising major tax cuts in the December Budget would be unwise, as this could further fuel demand. Some tax cuts aimed at the lower paid could be justified and commitments could be made to more general reductions in later years of the programme. There is also a clear case for welfare increases. Conceding further pay increases for the duration of the PPF would risk building in a permanently higher rate of inflation; new measures to encourage profit and gainsharing in the Budget could help, though there is no clear way yet of applying such a deal in the public sector.
The Government, beset by political controversy in the run up to summer, faces crucial economic choices over the next few months. If it thinks a "giveway" Budget can boost its poll ratings and also save the national agreement, then it should think again. Its efforts must be devoted to helping economic growth to ease back gradually and to tackling longer-term issues such as competition policy and investment in infrastructure.