Recent inflation trends have been reasonably encouraging and yesterday's figures from the Central Statistics Office showed a moderate 0.1 per cent increase in October. The annual rate picked up slightly to 2.7 per cent from 2.5 per cent the previous month, but overall inflationary pressures remain muted in many areas of the economy.
Government policy, however, must concentrate on areas where a lack of competition is allowing inflation to continue at a rapid rate. It is also important that the forthcoming Budget does not add to inflationary pressure.
It has been evident for some time now that there is a significant divergence between inflation in the goods and services sectors. Goods inflation is running at a moderate 1.6 per cent, reflecting competitive pressures in many areas of the retail trade and the strength of the euro. Clothing and footwear prices continue to fall and even food prices are running marginally below 2003 levels. However, inflation in the services sector is running at an annual rate of 3.7 per cent, with significant increases in health, education and restaurants and hotels.
It is essential that the Government do everything possible to hold down inflation next year. Already prices here are, along with Finland, the most expensive in the euro zone and this has implications for competitiveness. The only way that this situation can be reversed is if the rate of inflation here is well below the EU average for a period. At worst, inflation here must be held to the EU average so that our relative position does not deteriorate.
This has two obvious implications for Government policy. The first is that competition policy must be pursued vigorously, particularly in areas of the services sector. Some sectors - such as airlines and telecommunications - have benefited from an increase in competitive forces. However, competition remains restricted in many areas of the professions and ineffective in some other sectors, such as energy.
Budgetary policy must also focus on holding down the rate of inflation. Most obviously, indirect tax changes must be held to a bare minimum. There may be health reasons for continuing increases on cigarette prices, but beyond that there appears little need to push up excise duties or other indirect taxes in next month's package. The Exchequer finances are flush and unlike the last couple of years the Minister for Finance should not have to resort to higher excise duties or so-called "stealth" charges to bring in more revenue. Keeping down the inflation rate may not be a very exciting budgetary goal, but in terms of long-term prosperity and growth it is vital.