Inflation surge could lead to showdown with union

DUBLIN — The Irish government is facing an increasing economic headache following a further surge in inflation which rose to an annual 5.2 percent in May — the highest for 15 years.

The increase from 4.9 percent a year in April resulted mainly from higher mortgage interest payments, increased housing rental charges, and dearer tobacco, food and drink, according to the Central Statistics Office.

The increase comes as a surprise to most economic analysts, who had been expecting no change, or even a marginal fall on the April rate.

It will also anger trade union leaders, who have accused the government of complacency on inflation.

Consumer prices increased by 0.7 percent in May, compared to 0.5 percent in May 1999.

The most notable annual rises have been tobacco, up 17.1 percent; transport, up 8.3 percent; fuel and electricity, up 7.1 percent, and services, up 6.4 percent.

Inflation has been increasing steadily since it bottomed out at 1.2 percent in July 1999. It may soar further next month as a result of higher interest rates from the European Central Bank.

The continuing surge in prices will put extra pressure on the latest national partnership incomes agreement.

Partnership deals delivering wage increases, tax cuts and measures for the less well off have been a central feature of Irish economic policy since the late 1980s.

In March, the 500,000-strong trade union membership voted almost 70-30 in favor of the new Program for Prosperity and Fairness. It will deliver 15.75 percent in pay increases and 10 percent in tax cuts over 33 months.

The deal was front-loaded to give a 5.5 percent pay increase in the first phase this year. But inflation is now eating away at the benefit to workers.

The government is due to announce details of a new Finance Bill aimed at tackling the crisis caused by soaring house prices later this week.

However, trade union leaders say they also want immediate reductions in taxes on fuel, higher transport subsidies and maximum price orders for drinks in pubs and restaurants.

They are also seeking a tripartite committee with government and employers to monitor prices.

Irish inflation is now running at over two-and-a-half times the average 1.9 percent in other EMU countries. There are fears the economy may overheat as inflation increases and property prices continue to soar.

The problem is being worsened by labor shortages, with unemployment at 4.7 percent — the lowest since September 1982.

Finance Minister Charlie McCreevy cannot use economic tools like currency changes or raising interest rates to combat inflation.

The economy is subject to monetary policy set by the European Central Bank as a result of Ireland’s membership of the EMU.