The trade union movement and IBEC have recently been lobbying the Government to take steps to reduce inflation.

According to a Morning Ireland interview with Des Geraghty, president of SIPTU, the Government should cut taxes on petrol and fuel to relieve pressure on the price level. IBEC in turn has called for a reduction in VAT as an inflation-fighting measure. All agree that the Government should have a comprehensive anti-inflation strategy.

Membership of EMU rules out the most obvious policy measure: raising interest rates. It was predictable that inflation for a boom ing economy would be more of a problem inside a monetary union than if some monetary independence were retained.

Examples abound of regions within a fixed exchange rate system experiencing relatively high inflation: for instance, fast-growing Japan experienced average annual inflation rates of 6 per cent during the 1960s when the yen was pegged to the dollar.

Pressures in a booming economy which translate into currency appreciation in a floating system show up in a relatively higher inflation rate in a single-currency system. The Japanese inflation rate sharply dropped once the yen floated in the early 1970s, with a rising yen taking the strain.

Some of the factors which have led to recent high inflation figures are clearly temporary. The euro is sure to recover from its weak position against sterling and the dollar; world petrol prices are already falling after the recent OPEC agreement to expand production.

Rather, the strongest mediumterm inflationary pressure is clearly the tight labour market and the attendant rise in wages.

Services inflation, which is heavily influenced by labour costs, is now running at about 6.5 percent. Strong consumer demand in the economy is also placing upward pressure on prices in the non-traded sector: the recently implemented tax cuts will only add to the momentum.

Tinkering with selective cuts in indirect taxation is not a sensible anti-inflation strategy. Most importantly, if wages are projected to grow on a year-on-year basis, the impact on the overall price level can be offset only by a strategy of continuously reducing indirect taxes on an annual basis: one-off interventions will have only a temporary effect.

If the tax cuts are selectively applied only to a narrow range of goods and services, the strategy also distorts purchasing decisions: some prices are held down but others rise more quickly. Cutting petrol and fuel taxes is also contrary to good environmental policy. By adding to effective purchasing power, the tax cuts would further add to consumer demand pressures in the economy.

Reductions in indirect taxation also involve a loss in revenue. This comes at a price in terms of a lower capability to reduce other forms of taxation (such as income taxes), raise public spending, pay down the public debt or set aside funds for future pension needs.

Accordingly, it is not sensible to make tactical adjustments to indirect taxes outside an overall fiscal strategy. Are we sure we prefer lower fuel prices to greater public investment, healthier public finances and reduced income taxes?

Part of SIPTU's motivation in calling for lower fuel prices is redistributive in nature and is intended to protect the low-paid and those on fixed incomes.

Rather than bundling anti-poverty policies with a short-term response to an inflation spike (rich owners of petrol-hungry luxury cars would also benefit from a reduction in the petrol tax), redistribution can be better delivered via a strategy to improve directly the position of low-income groups.

There are other interventions the Government can pursue which not only would reduce inflation but, unlike reductions in indirect taxation, are also good in themselves.

Telecom prices fell by 7.8 per cent in 1999 and, as pointed out last week by the Competition Authority, vigorous competition policies in a range of sectors would allow significant sectoral price reductions, both reducing overall inflation and improving the range of choices available to consumers.

Even with such desirable interventions, however, the fundamental driving force behind inflation is rapid wage growth and the highly expansionary fiscal stance.

These two trends are at the heart of social partnership and it is unlikely that the unions will agree to reversals in either wage increases or tax cuts.

A tighter fiscal policy (via smaller income tax reductions and a curb in spending) would be a more effective inflation remedy than the looser fiscal policy proposed by advocates of cuts in indirect taxation. Perhaps the most sensible conclusion is that despite recent protestations to the contrary, fighting inflation is in fact not an important priority for the social partners.

Philip Lane is an economist at Trinity College Dublin plane@tcd.ie www.economics.tcd.ie/plane