The slight increase in the rate of inflation to 3.2 per cent last month came as something of a surprise. The trend had been downwards since February and a further decline had been anticipated. However, the 0.1 percentage point rise in the annual rate was fairly minor and forecasters still expect inflationary pressures to ease gradually moving into next year.
The main cause of the monthly increase was the end of the summer sales. A big cut in clothing and footwear prices as the sales got under way in early summer helped to bring down the inflation rate in June and July. However as the sales ended, clothing and footwear prices rose by 8.7 per cent last month, contributing significantly to the monthly increase. Elsewhere, the figures did nothing to suggest that the downward trend evident in recent months would not continue, although ESB and postal increases are still to come.
While the inflation rate has come down significantly in recent months it is still above the EU average. The latest figures show the average rate in the EU at 2.3 per cent. This indicates that price competitiveness here is continuing to suffer. Unfortunately, inflation here has been significantly above the average over the past couple of years and this will contribute to job losses in price sensitive sectors. Meanwhile the competition from lower cost locations was amply highlighted this week with the job loss announcements from 3Com and Schneider Electric.
Ireland will never be able to compete with the lowest cost location. However, maintaining an inflation rate close to our EU partners is still vital for competitiveness. The weakness of the euro has partly protected Irish industry in recent years, but more jobs could be vulnerable if the upward trend in the currency evident early this year was to resume.
Controlling inflation must be a consideration in framing the Budget package. Business is calling on the Government not to increase indirect taxes again and to avoid pushing up the inflation rate. The Government, of course, has to raise money from somewhere. However, it should avoid the kind of indirect tax increases seen in the 2003 Budget, which have kept the inflation rate this year higher than would otherwise have been the case. Just as important will be policy towards State-controlled companies, many of which are pushing up prices well ahead of average inflation.
The euro zone target is to keep inflation below two per cent and this should be our goal as well. However, with pressure on the public finances it will not be easily achieved.