By Andrew Bushe
DUBLIN — A new warning about rising inflation is given in the latest quarterly review from the Economic and Social Research Institute’s that says the economy is experiencing severe, but possibly temporary, supply constraints.
The think tank says the strength of demand is putting severe pressure on the economy’s infrastructure and the natural environment, raising quality of life considerations and concerns for the medium term sustainability of economic growth.
"Inflation has become the prominent economic concern this year, with the growth in consumer prices surpassing the falling unemployment rate for the first time in nearly two decades."
The Institute forecasts inflation will average 4.8 percent for the whole of this year and moderate to 3.2 percent in 2001.
It predicts a growth rate of real GDP of 8.8 percent this year and 6.9 percent in 2001. The unemployment rate is expected to fall toward 4 percent.
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Inflation during 1999 was 1.6 percent, but this year it has surged to 5.2 percent last month — the highest in the Eurozone countries.
The price spiral threatens the key national Program for Prosperity and Fairness wage pact as workers see their pay benefits eroded.
The 33-month income deal agreed to in March is to deliver 15.75 percent in pay increases and 10 percent in tax cuts. The deal was front-loaded to give a 5.5 percent pay increase in the first phase this year.
The study says that to stabilize prices, the next round of the pay deal’s income tax cuts in the December budget should be postponed — a view that is unlikely to find favor with either the trade unions or the government.
"Further income tax cuts should be pushed out toward the latter part of the agreement to temper demand," the study said.
The ESRI says demands from the trade unions for reductions in indirect taxes in an attempt to manipulate inflation and preserve real wage increases will further stimulate demand and could prove self-defeating.
"The imperative for the future is how to slow the economy to growth rates sufficient to ensure sustainable development and its necessary counterpart of price stability," the study said.