Inflation is down but it may take years to get Ireland off the top of the EU prices league, writes Cliff Taylor, Economics Editor
A tale of two economies: in one, prices seem to head relentlessly higher, leading to tales of "rip-off Ireland"; in the other, prices are static or falling, as fierce competition has an impact. Over the past few months, price pressures have eased substantially and the annual rate of inflation is dropping fast. Last month it fell below 2 per cent for the first time since 1999 and by April it should be at 1 per cent or less.
However, we are left with two problems. One is that after the sustained inflation of recent years, the actual level of prices here is now, along with that of Finland, the highest in Europe. And despite the general inflation slowdown, prices in some areas continue to head upwards, with Eircom pushing up line rental charges this week for the third time in a year, prices in pubs still on the rise, and many service providers still cashing in.
Figures for the last four years show clearly the gap between the high and low inflation sectors. They also suggest that - generally - inflation is lowest where competition is fiercest, pointing the way for policy-makers to address the remaining inflationary areas of our economy.
On average, consumer prices have risen by 18 per cent since 2000 (the figures used in the table, right, compare December 1999 with December 2003 to give a full four-year comparison). Some of the biggest increases have come in areas where the Government has an influence, either through regulation, imposing indirect taxes or setting charge levels.
Electricity prices, for example, have risen by 24 per cent over the period as, ironically, the regulator has allowed prices to drift upwards in an attempt to attract competition into the market. Charges for refuse and water have more than doubled, largely reflecting the introduction of new bin-collection charges in many areas. And prices in the health and education sectors have both risen by more than a third over the four years. In health, this is due not only to higher outpatient and medical costs in hospitals but also to rises in the region of 40 per cent in doctors' and dentists' fees.
Sometimes it's the smaller items - in terms of the family budget - that really annoy people. Motorists have been hit since 2000 with a 30 per cent rise in motor tax and a 37 per cent jump in the cost of a driving licence.
Some of these increases have been driven purely by the Government's desire to raise more cash (witness also the 29 per cent rise in cigarette prices over the past four years). However, many of the higher price sectors are also characterised by weak competition.
Insurance is one example. Prices have gone up by 35 per cent over the past four years and Tánaiste Mary Harney is threatening to beat the bushes to try to encourage more international companies to write business here. More broadly in the financial sector, Central Bank data show that by comparison with the rest of the EU, interest rates compare better in high competition areas such as mortgages and worse in areas where competition is weaker, such as overdraft rates.
Sometimes, however, competition is not easy to introduce. For years the ESB operated as a State monopoly and charges to domestic users were relatively low while businesses complained that they were charged too much. The result of opening up the market, however, has been higher prices for all, though the increases have been much bigger for domestic consumers who, the electricity regulator argues, were not being charged the true cost of supply before.
This may be the case, but the ESB is coining increased profits and the future of the market remains unclear, with the Government examining key structural issues. It is a lesson in just how difficult it is to introduce a genuine pro-consumer environment where huge investment is needed to enter the market in an area dominated by a former State monopoly.
Telecommunications is a more competitive market since the old Telecom Éireann monopoly was ended. The extent - and limitations - of this development are evident in falling call charges offset by the increase in Eircom line rental charges, the latest of which was announced this week. The telecoms regulator pushes Eircom to reduce phone charges, but in the one area where competition is absent - line rental - costs are the highest in the EU.
Still, overall telecom charges have risen by just 7 per cent in the past four years, showing that competition has had some impact. And the experience of the airline market shows that it takes some time for competition to bring prices down across the board. Ryanair started the low fares drive in the 1990s, benefiting those who flew with the airline, but it wasn't until Aer Lingus began to slash its own costs - and fares - in the past couple of years that the average cost to air passengers fell. Average air fares are 9 per cent higher now than four years ago, but fares have actually fallen over the past two years by 3 per cent.
However, it is in the retail trade that competition is having its biggest impact. Low-cost clothing production and the entry of new stores into the Irish market have led to a drop in the price of clothing and footwear by a striking 14 per cent over the past four years.
Also in the retail area, the prices of furniture and house furnishings have risen by only 5 per cent since 2000, and in certain sectors of this market, such as household textiles and domestic appliances, they have actually fallen.
The rise in the value of the euro should underpin this trend by cutting import prices from non-euro states such as Britain.
Food prices, one of the largest items of the household budget, show a 14 per cent rise, closer to the average, with the entry of lower-cost stores such as Lidl and Aldi likely to hold down increases.
Pure competition, of course, is not the answer to everything. For sectors such as electricity and telecommunications the challenge is to find the correct mix of competition and regulation to hold prices down, while at the same time ensuring key economic needs, such as security of energy supply. And in other areas the onus is on the Government not to push up charges too rapidly itself, or allow agencies under its control to do so.
In many areas, however, competition is key. The Competition Authority is currently investigating the professions, many of which have been to the forefront in pushing up prices. In the area of medicine, for example, preliminary work done for the authority by Indecon consultants points to issues such as the restrictions on entry numbers to medical schools, the set-up of the GMS system for GPs, the rules on doctors transferring from other jurisdictions, the way consultants are appointed, and the restrictions on advertising.
Other professions - such as the law, dentistry and veterinary medicine - are also on the Competition Authority's list. Extra competition in some of these areas could lower costs in other sectors: for example, high legal costs are a key factor in insurance and in general business costs.
Beyond that, much is down to the consumer, with economists believing that the easing of inflationary pressures is due in some part to heightened price consciousness. However, the unfortunate fact is that despite the inflation slowdown, we are perched at the top of the EU prices league, with implications for competitiveness and tourism. Only a few years of below-average price rises can bring us back down from this uncomfortable perch.