Category: Archive

Inflation raises fears that economy may overheat

February 16, 2011

By Staff Reporter

By Andrew Bushe

DUBLIN — The government’s spiraling-prices headache worsened this week when new figures showed that inflation had surged to an annualized 5.5 percent in June, the highest since August 1985.

Prices are now rising at more than two-and-a-half times the European Union average of 2.1 percent as a government anti-inflation campaign is attempting to safeguard the crucial national incomes policy.

The increase from the May annual inflation rate of 5.2 percent followed higher mortgage interest repayments, dearer food and increased transport costs.

According to the Central Statistics Office figures, consumer prices in Ireland increased by 0.6 percent in June, compared to 0.3 percent in the same month last year.

The most notable annual rises have been tobacco, up 17.5 percent; transport, up 9.3 percent; fuel and electricity, up 8.2 percent; services, up 6.7 percent, and housing, up 6.1 percent.

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The latest figures will further anger trade union leaders, who say the government’s anti-inflation action is too little, too late.

They may seek to trigger a review mechanism in the Program for Prosperity and Fairness and renegotiate the basic terms.

The 33-month long PPF, which was agreed to in March, is to deliver 15.75 percent in pay increases and 10 percent in tax cuts in three phases.

The inflation spike is eroding the benefit of the first-phase 5.5 percent pay increase. The government maintains that, with budget tax cuts in last December’s budget, workers will get increases of 9-14 percent this year.

With a spending boom fueled by record foreign investment and job creation, unemployment at its lowest since 1982, growth expected to reach about 8 percent this year and house prices soaring by 20 percent a year, there is concern the economy may overheat.

Inflation has been increasing steadily since it bottomed out at 1.2 percent in July 1999. There are fears it may surge further in coming months.

Finance Minister Charlie McCreevy opposes any changes in the PPF deal, saying it could "put the economy off the rails."

"I think it would be very foolhardy to make decisions that will have long-term effect on the Irish economy on the basis of a few months or a few weeks inflation figures," he said.

The government has brought in a package to try to deal with the property-price spiral. It has also frozen drink prices and vetoed an 8 percent premium rise sought by the semi-state VHI health insurance company.

There is also a freeze on public-sector charges and levies for the rest of the year.

McCreevy and seven other senior ministers are holding consultations with builders, retailers, lawyers, doctors, bankers and brokers to emphasize the need for "social responsibility and restraint" on fees and profit margins.

McCreevy can’t use economic tools like currency changes or raising interest rates to combat inflation. As a euro economy, Ireland is subject to monetary policy set by the European Central Bank.

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