After three months of holding steady at 6.2 per cent, the inflation rate jumped last month to 6.8 per cent. Higher mortgage costs and rising oil prices were largely responsible for the rise. While the figure may now be at - or close to - its peak in the current cycle, an inflation rate of close to 7 per cent must be worrying, not least because there is now a real danger of an uncomfortably high rate becoming embedded in the economy.
The immediate implications are clear. Trade unions will point out that the 5.5 per cent wage rise under the PPF this year has now been more than eroded; for those reliant on welfare payments, increases in the last Budget have also been outstripped by higher prices. The figures will also add more heat to the industrial action being started by secondary school teachers next week.
Perhaps the greatest danger now is that we are all starting to get accustomed to higher inflation. Employees are demanding higher wages, retailers are pushing up prices and consumers are less surprised when they see higher price tags. If this cycle continues, then higher inflation will become the norm and this in turn would threaten the competitiveness of the economy in the long term. Some slowdown in growth would be welcome. But the danger is that if higher inflation takes hold we may not get a gradual easing in growth, but rather a more sustained downturn.
What can be done? The Government faces a difficult balancing act in trying to keep inflation in check, while also preserving social partnership. Together with the social partners it has been discussing the future of the Programme for Prosperity and Fairness and the aim is to conclude this review next week. The Government will cut taxes in the Budget to boost employees' take-home pay. However the Minister for Finance, Mr McCreevy, will need to be careful not to introduce an income tax package which adds too much demand to the economy. The Budget should also be able to guarantee some real improvement to the lot of those relying on welfare payments. There is also a case for some selective reductions in indirect taxes, with measures to ensure that these are passed on to consumers. This would lower the measured rate of inflation moving into next year, which is now a crucial goal. However Budgetary increases in welfare payments and income tax and reductions in indirect taxes are unlikely to be enough to satisfy trade union demands. They also want employers to chip in. The employers' body, IBEC, is refusing to budge.
A general increase in the agreed wage increases over the term of the PPF is not justified. This would only ingrain a higher inflation rate in the economy. However employers should consider giving some ground and may need to make an imaginative response; few enough, for example, engage in genuine profit-sharing and many have made healthy returns over the past few years and could look at ways to give their employees some tangible reward. Employers will have to judge whether to make some gesture - otherwise the pressure on the PPF may reach breaking point.
The Government will also need to carefully judge its Budgetary strategy. The priority must be to fight inflation and preserve social partnership, rather than to win short-term political popularity.