Employers and opposition parties have reacted with alarm to the news of the figures released by the Central Statistics Office. The Irish Congress of Trade Unions warned that the 10-year national pay agreement, only finalized last year after tortuous lengthy negotiations, may already have to be renegotiated as pay rises are eroded by the sharp rise in the cost of living.
The government is being blamed for some increases, but mortgage interest rate rises set by European Central Bank — ironically to cool inflationary pressures in the Eurozone — have also contributed to the high cost of living.
The rate of increase of inflation in December was 4.9 percent, up 0.3 percent on the previous month and the highest monthly rise since March 2003. The rise brought the average rate of increase in the cost of living over the year to 4 percent in 2006, a four-year high from 2002 when it hit 4.6 percent.
However the government has driven some of the inflationary pressure itself: tobacco rose by 7.3 percent during the month while over the year the price of alcohol and tobacco rose by 5.1 percent.
If the price hikes for booze and cigarettes prompted you to stay at home, there was little comfort here either: heating gas and electricity rose by 8 percent in December, compared to a mere 1.2 percent rise in the cost of goods.
Big gas and electricity price hikes sanctioned by the state energy regulator have also contributed to inflation. The cost of services such as housing, water, electricity and other fuels rose by a staggering 21.5 percent over the year. Energy product costs went up by 8.2 percent, although this compared to a 12.6 percent rise in 2005 and an 8.4 percent the year before.
Irish economists gave mixed views on the figures, fractionally above predictions of 3.9 percent. With electricity prices increasing by 12.6 percent on Jan 1, further rises are expected.
“It’s a high number but there’s nothing too threatening there … we will see inflation rising again in January but you’d hope to see an easing trend over the balance of 2007,” said IIB Bank chief economist Austin Hughes.
Less sanguine was Bloxham Stockbrokers chief economist Alan McQuaid.
“It was a disappointing year all around on the consumer prices front in 2006, with the headline inflation rate running at 3 percent or above in each one of the 12 months…The government has received a lot of flak lately from opposition politicians as regards its contribution to inflation in the past year, and it will have to take a hard look at itself, because there is no doubt that it has been too relaxed about rising price pressures in areas that it has control over,” he said.
The rate of inflation is determined according to a “basket” of commodities, including mortgages and tobacco and fuel costs. The government can point to some items being outside its control such as mortgages: these have been increasing steadily since the European Central Bank has risen Eurozone interest rates six times from 2 percent at the end of 2005 to five-year high of 3.5 percent at the end of 2006. Mortgage interest rates rose by 31.5 percent as a result over the year.
However, head of research at Ireland’s largest trade union SIPTU, Manus O’Riordan, blamed the government for the increases. “The data clearly shows the indirect taxation measures of last month’s Budget had an immediate effect of 0.4 percent on the index,” he said, and argued that inflation would average out at 4.1 percent in 2007 despite the government predicting 3.75 percent.
The Labor Party spokeswoman on Consumer Affairs Kathleen Lynch said: “This makes a complete mockery of Finance Minister Brian Cowen’s confident prediction last December that inflation would average 2.6 percent in 2007.”
The figures brought rare unity for Ireland’s umbrella groups representing business, employers and workers.
The Irish Business Employers’ Confederation blamed the government for much of the inflation rise through increases in gas and electricity as well as health and education. Mark Fielding of the Irish Small and Medium Enterprise group representing smaller businesses said: “Inflation is spiralling out of control and if allowed to continue, will do untold damage to the small business sector in terms of investments and jobs…It’s conceivable that our inflation rate could hit 6 percent if remedial action is not taken by the government.”
Economic adviser to the Irish Congress of Trade Unions Paul Sweeney said that the government had not curbed “its own inflationary policies and practices” and attacked that state’s “bizarre regulatory regime” for energy supply, which he claimed drives prices up to supposedly stimulate competition in the energy sector.
ICTU general secretary David Begg said that if inflation was to hit 6 percent then pay rises negotiated for workers as part of the national partnership pay agreement Towards 2016 would have to be renegotiated.
“If it goes up to 6 percent and stays there, then we’re in a bit of difficulty. We’re back in the autumn to negotiate the next phase of the agreement and if there is a shortfall in workers’ incomes, we’ll have to renegotiate,” Begg told the Irish Times.
However another method to measure of inflation across the European Union – the Harmonized Index of Comsumer Prices which omits interest rate rises – will make more welcome reading to the government and economists, showing that Ireland’s annual rate of inflation increase was 3 percent. This is above the EU desired benchmark of 2 percent but well within Ireland’s economic growth rate of over 5 percent expected over 2006 and 2007. An inflation rate outstripping growth rates would mean that Ireland’s economic growth is being eaten away by price rises.
Whatever the figures over a short time-span, consumers are bearing the brunt in a country that now ranks among the most expensive in the world. Between 1999 and 2004, prices in the Republic increased by 17.5 percent, more than twice the EU average.
Government policy will also see an estimated