Inflation has taken hold in the economy and all the indications are that the rate of increase of the consumer price index in June and July will creep close to, or even surpass, six per cent. Nothing the Government has proposed in its inflation package this week will stop that. In the Dail yesterday the Taoiseach said inflation could rise as high as 6.2 per cent, a full percentage point above its last recorded level of 5.2 per cent. He also admitted that the full impact of the strength of sterling on import prices was not fully reflected in the current statistics and could yet exacerbate the situation.
In its latest bulletin, published yesterday, the Central Bank warns that underlying inflation is likely to remain significantly above the euro zone average for some time. It, too, warns that inflation is likely to increase in the months ahead, but says it may be close to its peak. It forecasts an average consumer price inflation rate of 4.75 per cent this year. The worry, as the Central Bank points out, is that labour market pressures are likely to intensify as employees seek wage rises to compensate them for higher inflation and to enable them to compete in the spiralling property market. The danger is that a sustained loss of competitiveness could result, as Irish wages grow faster than those of our competitors. As the Central Bank indicates, this leaves the Republic increasingly vulnerable in the event of an economic shock or a rise in the value of the euro.
The Government's response has not been impressive and the broad package of measures announced on Tuesday, in a bid to shore up the Programme for Prosperity and Fairness, is largely aspirational. The coalition says it will introduce price controls on a range of alcoholic drinks, but it has yet to decide on which products or from what date prices will be frozen. It is giving additional resources to the Director of Consumer Affairs to police the order but past experience suggests enforcement will be very difficult and possibly not practical at all.
The Government ruled out selective reductions in excise duties which might have taken the immediate pressure off wage demands. Instead, it will consider such measures in the context of the next Budget. If the Government were to take the advice of the Economic and Social Research Institute, any reductions would be matched by increased charges for environmentally sensitive goods or services, such as water and road charges.
But the ultimate policy goal must be to encourage competition. If the Government really believes that publicans are profiteering, as the Minister of State, Mr Tom Kitt, implied on Tuesday, why did it not amend the Intoxicating Liquor Bill, due to be passed by the Dail this week, to counteract the problem? A recommendation of the Competition Authority to remove the barriers to entry to the pub market, particularly in Dublin, has so far been ignored. Instead a commission, set up to examine the off-licence market in particular, will now have to report back in three months.
In a move which has been welcomed by the trade unions, big business will be asked to keep the wider needs of the economy in mind rather than focusing on short-term profit. And charges imposed by State bodies will be frozen for the rest of the year. It is hardly surprising that the Irish Congress of Trade Unions gave only a guarded welcome to the Government's package. It called it a "first instalment", but warned that much more needed to be done. The ICTU must be hoping that the measures will be enough to mollify its members until inflation itself begins to fall back. But in the meantime opponents of the PPF are expected to begin a campaign for congress to convene a special delegate conference to review participation in the national agreement.
One thing that this week's events demonstrate is that there are no easy answers. But in the long term only greater competition will reduce price pressures and the Government must be prepared to bite the bullet, no matter what vested interests are at stake.