The rate of inflation is set to fall further, after hitting a four-year low of 1.9 per cent in December. It is now expected to drop towards 1 per cent in the coming months, as the rising value of the euro pushes down the prices of imports. Cliff Taylor, Economics Editor, reports.
Excise increases in December's Budget were much less than the previous year, leading to a drop in the annual inflation rate for the fifth successive month. The price of the basket of goods measured by the consumer price index has hardly changed since last April, according to the Central Statistics Office figures, showing a sharp fall-off in inflationary pressures.
The extent of the drop in inflation over recent months has taken most forecasters by surprise. In last month's Budget, the Department of Finance predicted a 2.5 per cent average inflation rate for this year, but most analysts now believe the average will be below 2 per per cent.
Forecasters at Davy stockbrokers are now predicting that the annual inflation rate could fall below 1 per cent during the spring and average 1.3 per cent for the year. Goodbody stockbrokers, who expect European interest rates to rise later this year, estimate a slightly higher 1.9 per cent average for this year. However, whatever the outcome it looks certain to be well below the 2003 average of 3.5 per cent.
The fall in inflation will boost the real value of pay increases this year. The pay of private-sector workers covered by the national agreement will be 3 per cent higher this year on average than in 2002, while public servants will receive a 4 per cent rise, plus benchmarking increases.
The annual inflation rate for goods was 1.1 per cent in December. It has been low for some time, partly due to the impact of the rising euro. What has changed in recent months is that services inflation has moderated,with the annual rate here falling to 2.8 per cent.
The fall in inflation will set the scene for negotiations due to begin in March on pay terms for the second 18 months of the current national agreement. Employers and the Government are likely to seek relatively low increases, arguing that these are appropriate with inflationary pressures easing.
Setting down a marker for these negotiations, Mr David Begg, the general secretary of the Irish Congress of Trade Unions, said that the Government must cease its policy of raising indirect taxes and also of allowing increased administrative charges over the period of the next agreement.
Much more active intervention was also required to stop "rip-off Ireland", he said, as the rising value of the euro was not being fully reflected in prices here.
While the fall in the inflation rate was welcome, Mr Begg said, he pointed out that because price levels here were much higher than in the rest of Europe, Irish workers still had to pay much more for goods and services.
Meanwhile Mr David Croughan, chief economist of IBEC, the business lobby, said that lower inflation must not be a comfort signal for either the public or private sheltered service sector to let up on their efforts to reduce costs.