The latest inflation figures are a cause for serious concern. Most forecasters had expected the May figure to fall back from the 4.9 per cent recorded in April. Instead, the annual increase in the consumer price index reached 5.2 per cent and all the indications are that the June rate will not be far off 6 per cent. The latest figures clearly show that inflation has taken hold in the economy, with prices rising in many sectors.
The Government's response to the rise in inflation in recent months has not been impressive. Only yesterday's surprise increase above 5 per cent appears to have jolted it into considering some concerted action. There are now suggestions of price controls being imposed in some sectors, the implications for welfare recipients are being examined and the Government must surely also be assessing whether to announce selective reductions in excise duties to take the immediate pressure off wage demands.
Price controls are a blunt weapon and not an ideal tool of economic policy. Evidence of profiteering in sectors such as the pub trade may give a reason to consider a selective use of this policy. But the ultimate policy goal must be to encourage more competition; if Ministers really believe that publicans were cashing in, as some said yesterday, then why did they take such a cautious approach to deregulation in the Intoxicating Liquor Bill published in April?
A recommendation of the Competition Authority to remove the barriers to entry to the pub market, particularly in Dublin, was ignored and the sale of liquor by other outlets is to be examined by a commission - over the next two years. Fast action in these areas would be much more effective than temporary price controls in keeping prices down.
In general, an active and determined competition policy is a key policy measure in tackling inflation. In this regard the Government's tardy response to the recent staffing crisis at the Competition Authority is not encouraging. The authority must rapidly be given all the resources it needs to tackle cartels and other anti-competitive behaviour which still affect many sheltered areas of the economy.
Reducing excise duties would help to reduce the consumer price index rate, but only in the short term. It would also put more money into the pockets of consumers and thus give an unwelcome boost to demand. However it is now worth considering lower excise duties or VAT to help lessen demands for higher wage increases. Leaving it until Budget day in December, as the Minister for Finance recently hinted at, might be too late.
The real danger is that wage increases now start ratcheting upwards to keep pace with inflation, seriously undermining competitiveness. If this happens then the ability of the economy to continue to outperform the international average will be quickly eroded. And our exposure in the event of an unexpected international economic shock would be all the greater.
To its credit, the Government now appears ready to take radical - if belated - action to tackle inflationary pressures in the housing market on foot of recommendations from economist Dr Peter Bacon. These are to be announced tomorrow. While housing prices are not measured in the consumer price index, their rise in recent years has been a key inflationary factor in the economy, contributing in no small measure to pressure on wages.
However further action is also needed. The Government has been caught unawares by the sharp rise in inflation and needs to quickly demonstrate that it can put forward a coherent strategy to deal with a problem which now seriously threatens to undermine forecasts for continued strong economic growth.