Talk of runaway prices is highly inflated


Spare us talk of an 'inflation shock': the rate of inflation is actually on the decline, according to the Central Statistics Office, writes Colm McCarthy

The following two propositions have assumed the status of urban myth: there has been a recent and substantial surge in consumer prices; this was caused by, or at least coincided with, the introduction of euro notes and coins in January.

Since there is no evidence whatever in support of the first proposition, the second need not detain us.

The most recent data (for July) shows that consumer prices in the eurozone were 1.9 per cent ahead of their level of one year earlier. This represents a slowdown in the pace of inflation for the eurozone as a whole. In January, eurozone inflation was 2.7 per cent. There is no pattern in these data, prepared every month by Eurostat, the EU's statistical service, to suggest a sudden jump over the months of the currency changeover.

In Ireland, consumer price inflation has been above the eurozone average, but has also been falling. Yesterday's release of the Consumer Price Index for August confirmed this. The 12-month rate was 4.4 per cent, 4.2 per cent and 4.5 per cent in June, July and August, lower than the average of 4.9 per cent for last year and well under the 5.6 per cent recorded in 2000. There is no jump in the Irish index over the year-end either.

How the public perception of a rise in inflation has been propagated is best left to students of the media. Given that pay negotiations at national level are set to get under way in the autumn, it is important that the official inflation statistics collected by the Central Statistics Office are understood.

Each month, on the second Tuesday, CSO personnel obtain prices on over 1,000 different items from a fixed panel of retail and service outlets throughout the country. The geographical coverage is nationwide, including outlets in 86 cities, towns and villages. About 200 part-time staff are employed by the CSO for this work and they obtain about 55,000 individual prices every month. In addition, 112 special inquiries are undertaken by CSO head-office staff each month to collect data on utility charges and services, including items such as electricity or cable TV costs.

An overall index of prices is then constructed, as well as a series of sub-indices for various purposes. The overall monthly index most often quoted is called the all-items CPI and it represents a weighted average of the prices of the wide range of items covered.

The weights are designed to reflect the actual spending patterns of Irish households, as determined by the household budget survey.

This survey is conducted nationwide by the CSO roughly every five or six years to keep the weights up to date - rising incomes change consumption patterns and fashions also change.

THE last household budget survey was conducted from July 1999 to June 2000 and 7,644 households throughout the country participated. A team of 55 full-time and part-time CSO staff conducted the fieldwork, and it is the returns from this exercise that determine the CPI weights.

Thus when the CSO assumes that 5.1 per cent of the household budget goes on clothing and footwear, with 13.2 per cent going on transport, it is basing these proportions on the expenditure pattern of the typical Irish household as revealed in these periodic large-scale surveys.

When it goes on to conclude that prices on average have risen by a particular percentage, it has prices collected afresh every month on the full range of products and services on which to base these calculations. It is a scientific, evidence-based exercise, done according to a consistent and internationally standard methodology.

Assertions in the media about rising consumer price inflation in Ireland are based, if evidence is given at all, on impressions, anecdotes, or roll-your-own "surveys" of a handful of items in a handful of stores. It is reckless of newspapers and broadcast media to give currency to this kind of stuff when the methodology of the CSO's consumer price index is an open book, explained in detail on its website and in various publications.

It is one of the most comprehensive inquiries the CSO does and it must absorb a substantial portion of its budget. If anyone can find flaws in its procedures, and no economists or statisticians have done so to my knowledge, I am sure that the CSO would be delighted to hear from them.

In the meantime, spare us the "inflation shock" stuff.

Colm McCarthy is managing director of DKM Economic Consultants