The Irish economy may well be in "amazingly good shape", as a senior Central Bank official put it yesterday, but there are still some grounds for concern about inflationary pressures. In presenting its Spring Bulletin yesterday the Central Bank suggested that the traditional method for measuring inflation - the Consumer Price Index (CPI) - underestimates the overall increase in the cost of living. It suggests a more inclusive method which, critically, includes some element of house-price increases and personal consumption price rises.
The result is a much less flattering picture of Irish inflation; using the more comprehensive measure - which is based on the national accounts - the Central Bank believes that consumer inflation is running at about 3.2 per cent, much higher than the level measured using the CPI.
In truth, a new approach is overdue. Given the importance of property prices to consumers and the rate of house price inflation, the exclusion of this sector from the CPI was unsatisfactory. The system based on the national accounts is not perfect; inevitably there will be a time lag between its figures and what is happening in the real economy. But it still should provide a better, more reliable guide to consumer inflation.
Dr Michael Casey, the assistant director general of the Central Bank, underlined the importance of house price inflation to the general economy yesterday; there was a real danger, he said, that it might prevent workers coming to this State and create further wage pressures in the economy. Significantly, the Bank was also moved to strike a note of caution about some investments in commercial property areas like hotels and shopping malls. Many of these investments, it suggested, were based on the assumption of low interest rates and continued high levels of growth, but it signalled that nothing is guaranteed. This is a timely warning, given the British experience of "boom and bust" and the concerns that some sectors of the economy are in danger of overheating.
As it is, there are already some pressures bearing down on the economy. In particular, average wages are already increasing by about 6.5 per cent per annum, some three times higher than the EU average. Ironically, the calculation by the Central Bank that the real level of consumer inflation is much higher than that measured by the CPI may intensify the pressure for still greater wage increases in the talks of a new partnership agreement.
For all that, the Irish economy continues to enjoy robust good health. The Central Bank's own forecast of 8.25 per cent growth in GDP this year may be less bullish than that released by the European Commission yesterday (it predicted growth of 9.3 per cent) but these are still astonishing figures. To place them in some overall context, the Commission also yesterday revised downward its projection for growth across the eurozone to just 2.2 per cent. The Central Bank, however, also usefully lists five key elements which are required to maintain competitiveness. These include the building of an appropriate modern infrastructure and continued investment in education, research and development. It is to be hoped that the bank's overall advice will serve as guiding principles for the discussion of a new partnership agreement.